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This week's question:

DATE: August 28, 2015

QUESTION:
Can you explain how time decay works on a credit spread strategy?

ANSWER:
A credit spread strategy allows a trader the opportunity to have time decay work in their favor while maintaining a favorable risk-reward outlook. Time decay is a term used to describe how the theoretical value of an option erodes with the passage of time. Typically, time decay is greatest for at-the-money and close-to-the-money options. The opportunity to have time decay work in your favor while having limited risk at the same time explains the wide appeal of this strategy to traders. To learn more about how time decay works with a credit spread strategy using a trade example, view this segment of "Ask the Institute."

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