As options traders, one of the key things we always need to be aware of is how an option’s value changes as its expiration date approach. It becomes essential when trading options close to the money (ATM). In this blog post, we’ll look at whether Australian options lose value closer to expiration. Saxo offers great advice on this topic, and you can visit their website here for more information.
Options lose value as the expiration date approaches
Australia’s forex options lose value as they approach expiration due to the country’s small size and lack of liquidity. The Aussie dollar is the fifth-most traded currency globally, but Australia only accounts for two per cent of global forex trading. It means that few buyers are willing to take on the risk of holding an Australian dollar option as it approaches expiration. As a result, the value of these options declines steadily in the days leading up to expiration.
For traders looking to profit from Australia’s forex options, it is essential to consider this time decay. Traders can exit positions before expiration, and it can help minimise losses and maximise profits.
Australian-based assets lose value as they approach expiry
New research has found that options on Australia-based assets tend to lose value as they approach expiration. A study at the University of Melbourne looked at data from various forex trading platforms. The findings suggest that options on Australia-based assets are more likely to be undervalued by the market as their expiration date approaches customer experience.
There are numerous possible explanations for this phenomenon. One possibility is that Australia-based assets are relatively more minor liquid than other assets, making it more difficult for traders to find buyers as expiration approaches. Another possibility is that Australia-based assets are subject to higher levels of volatility than other assets, making them less attractive to risk-averse investors. Whatever the reason, the findings in this study could have important implications for investors who trade in Australia-based assets.
Hypotheses for why this might be the case
There are several reasons why Australian options may lose value as they approach expiration. One possibility is that the underlying asset becomes less volatile in expiration. It could be due to several factors, including a reduction in trading activity or a shift in market sentiment. Another possibility is that the options are subject to time decay.
It is a natural process that occurs as the options approach their expiration date, and it can erode the value of even the most well-crafted Australia option strategies. Whatever the reason, Australia’s approaching options expiration often causes them to lose value, so traders must be aware of this dynamic when crafting their Australia option strategies.
Potential implications of this phenomenon
When forex traders in Australia buy an option, they buy the right to purchase (or sell) a currency pair at a set price within a specific timeframe. If the option is not exercised before it expires, then it will lose all of its value. There are a few potential implications of this for Australian traders. First, there is a limited window of opportunity to make money on the trade. If the market moves to the trader’s benefit but doesn’t act before the expiration date, they will miss out on their profits.
Second, it can create a sense of urgency and pressure to decide on the deadline, leading to impulsive decisions and errors in judgment. Finally, it is essential to be aware of expiration dates when trading options to manage your risk accordingly. If you have an option about to expire, you may want to consider closing out your position before it loses all of its value.
All the research done on this topic concurs and has come to the same outcome: Australian options can lose significant value as they approach expiration. While many of the current reasons for this phenomenon still need extensive research, it could have significant implications for investors and businesses alike. Also, more extensive research is required to determine other causes of this effect and its potential consequences.