High Level Investing For Dummies by Paul Mladjenovic

Author:Paul Mladjenovic
Language: eng
Format: epub
ISBN: 9781119140832
Publisher: Wiley
Published: 2015-12-02T00:00:00+00:00

The option is sold at a loss

Say that it’s the summer of 2018 (about six months before the option expires on December 31, 2018) and that raw land is not doing much pricewise. The land is still around $100,000, give or take a few thousand bucks. Now what happens to the option’s value? With only months to go on the shelf life of the option and the asset’s market value not doing much, the option starts to lose tremendous value. The loss in value for the option is referred to as time decay.

An option is a wasting asset, and if the underlying asset is not making any significant move toward the strike price, that doesn’t bode well for the option’s value.

Say that in mid-2018, the land’s market value is only $105,000. With only six months to go, the option’s value has plummeted to only $1,100 (I’m being kind here for the sake of the example — it could be even lower).

Bob decides that the outlook for raw land will not change much for the better in the remaining few months of the option’s life span, so he sells and takes a loss. He risked $5,000 but ultimately cashed out with $1,100 for a net loss of $3,900. Live and learn!

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