InvestorQ : Is it true that the call option is a wasting asset that becomes worthless over time?
prachi Patwardhan made post

Is it true that the call option is a wasting asset that becomes worthless over time?

Answer
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2 years ago


When we talk about wasting assets, we need to look at the two components of option value viz. intrinsic value and time value. It is only time value that wastes as expiry approaches. Intrinsic value does not get impacted by time but only by price movements. What do we understand by a wasting asset? In India stock and index options are available in 3 contracts viz. near month, mid month and far month. The contracts typically expire on the last Thursday of the month. The option value is a value for the right without the obligation. As the date of expiry approaches this value of this right keeps gradually reducing. In fact, as the option expiry date approaches, the value of the option starts falling drastically. In the above case, if the price of SBI is Rs.250 then the value of the Rs.255 SBI call option will approach 0 as the contract approaches the expiry date.