Time decay is one of the most important factors for traders to be aware of when trading warrants. Most warrants will have the greatest time decay during the last third of their life..
Traders beware: warrants become less valuable as they approach their expiry date, often declining rapidly in the last third of their life. Time decay happens regardless of what’s happening to the underlying share price, which means that buying a warrant close to its expiry date is a risky practice indeed. And if the warrant happens to be “out of-the-money” (see below) at expiry then too bad, the warrant expires worthless.
If the opportunity for a profit is looking sketchy towards the end of your warrant’s life, you’re better placed cutting your losses and preserving capital - possibly even switching to longer-dated warrants if your strategy permits – rather than hanging on to the bitter end.
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