Time decay
/taɪm dɪˈkeɪ/
nounB2
Definition
Time decay means losing value over time. In finance, it often refers to how options (a type of contract) become less valuable as the expiration date gets closer. It can also describe anything that gets worse or less useful just because time moves forward.
Was this helpful?
See It in Action
Financial meaning: loss of option value over time
- •The trader explained how time decay reduces the price of options as the expiration date nears.
- •Investors watch time decay carefully because it affects their profits.
- •Time decay is a key factor when deciding how long to hold an option contract.
General meaning: gradual loss or decrease due to time passing
- •The old book showed signs of time decay with its yellowed pages.
- •The value of some products suffers from time decay even if they are not used.
- •Time decay can affect anything that loses quality or usefulness over time.
Make It Stick
- ✓Think of "time decay" like "lose" (A1 word), but specifically because of time passing, not because of damage or use
- ✓Picture a piece of fruit slowly turning brown and soft as days go by
- ✓It's the feeling when you wait too long to use a coupon, and it becomes useless
- ✓Sounds like "time" + "decay" → imagine a clock next to a melting ice cube that slowly disappears
- ✓In stories, think of a magic spell that becomes weaker the longer you wait to use it
- ✓NOT like "break" (damage by force), time decay happens naturally over time without outside damage
- ✓NOT like "wear out" (damage by use), time decay can happen even if something is not used at all
- ✓NOT like "expire" (end completely), time decay is the gradual loss before something ends
Try Other Words
- •Depreciation: decrease in value over time (Use in financial or property contexts)
- •Deterioration: becoming worse (Use when physical condition or quality gets worse)
- •Wear and tear: damage from use over time (Use when loss is because of use, not just time)
Unboxing
- •Word parts: "time" (the continuous passing of moments) + "decay" (to slowly break down or lose value)
- •Etymology: "time" from Old English "tīma," "decay" from Latin "decadere" meaning to fall down or decline
- •Historical development: "Decay" has long meant gradual decline; combined with "time" to specify loss caused by passing time
- •Modern usage: Common in finance for options trading; also used in general to describe value or quality loss over time
Reflect & Connect
•How does time decay affect things you own or use every day, like food or technology?
•Can understanding time decay help you make better decisions about when to use or sell something?
Fill in the blanks
1.Time decay causes the value of an option to ___ as the expiration date gets ___.
2.Investors try to avoid losses from time decay by ___ their options before too much time passes.
3.Unlike damage from use, time decay happens ___ because of the passing of ___.
4.When a coupon expires, its value disappears due to ___.
5.Time decay is important to understand because it affects how long something can ___ its value.
6.The old painting showed signs of time decay, such as ___ colors and ___ paper.
7.Traders say time decay works ___ against option holders, so they must plan their ___ carefully.