Series 7 practice questioneasyOptions — Time Value Decay
As an option approaches expiration, what happens to its time value?
- AIt increases
- BIt remains constant
- CIt decreases (time decay)✓ Correct answer
- DIt converts to intrinsic value
Explanation
Why C — It decreases (time decay)
Time value decays as expiration approaches, a phenomenon known as theta or time decay. This acceleration is greatest in the final 30-60 days before expiration. At expiration, the option's value equals only its intrinsic value (if any), with zero time value remaining.
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