What Time Does to a PositionNeeds one idea
Every instrument has a clock in it. On some the clock pays you, on some it charges you, and on a few it does both at different points in the same year.
4 min read · 710 words
What this page is. A way of asking, of anything, what happens if the market does nothing at all. It is not a claim that any of these effects is good or bad — the same clock that charges one holder pays the person on the other side. Information and education only.
The question
- Most analysis asks what happens if the price moves. The other question is what happens if it does not move for a month, and the answers differ more between instruments than the first question does.
- Five distinct effects go under the loose word "time". They are not variations of one thing: they come from different clauses, they run in different directions, and an instrument can carry more than one.
The five clocks
| Effect | What happens with no market move | Where it comes from |
|---|---|---|
| Decay | An option loses value as expiry approaches | Less time for the price to travel |
| Roll | A futures position gains or loses at each roll | The shape of the forward curve |
| Pull to par | A bond's price converges on face value | The redemption clause |
| Reinvestment | Coupons and dividends land and must go somewhere | Payments arriving before maturity |
| Compounding drag | A reset product falls behind its multiple | Resetting exposure after each move |
Reading each one
- Decay is not linear. It accelerates as expiry approaches and it is concentrated near the strike, which is why a position that was patient for two months can lose most of its remaining value in the last two weeks. Volatility is the other half of the same pricing.
- Roll is the effect people meet without knowing its name. A commodity or volatility position held through several expiries pays or receives the difference between the expiring and the next contract each time. Over a year that can dominate the price move entirely. Futures is the instrument; the shape of the curve decides the sign.
- Pull to par is the one clock that is contractual and certain. A bond bought at 105 will be worth 100 at maturity, whatever happens in between — see why a bond trades above 100. It is the reason yield to maturity and coupon differ.
- Reinvestment is the assumption hiding inside every quoted yield. Money that arrives has to be put somewhere, at rates nobody knows yet. It is why a yield to maturity is exact and its realisation is not.
- Compounding drag applies to anything that resets a ratio on a schedule. It is arithmetic, not a fee, and it is set out in full on why a leveraged ETF loses over time.
Which instruments carry which
- An option: decay, and nothing else. Time is the whole of what you are paying for.
- A bond held to maturity: pull to par and reinvestment, in opposite directions. If rates fall the price rises and the coupons reinvest worse; if rates rise the reverse. That partial cancellation has a name — duration matching — and it is the basis of most liability-driven investing.
- A rolled futures position: roll, and no decay at all. People often describe it as decaying, which conflates two mechanisms with different causes.
- A share: no clock of its own. This is the honest answer and it is unusual — most instruments on this site have one.
- A structured note: often three at once. A barrier product with a fixed maturity carries decay on its embedded option, pull to par on its bond component, and a payoff that depends on where the price is on a specific date. The reverse convertible is the clearest example.
The two-minute exercise
- Set the market move to zero and step forward a month. Whatever changes is the clock, and it is the part that is knowable in advance.
- Ask who is on the other side of that clock. Decay paid by an option buyer is decay received by the writer. Roll cost paid by a long is roll yield received by somebody else. None of these effects destroys value; they move it, on a schedule.
- Then ask whether the position needs to be right quickly. An instrument with a clock against it converts "eventually correct" into "wrong", and that conversion is the single most common way a good view loses money.