What Is a Wasting Asset?

A wasting asset is an item that has a limited life span and irreversibly declines in value over time. Examples include depreciating fixed assets such as vehicles and machinery and securities with time decay, like options, which continually lose 澳洲幸运5官方开奖结果体彩网:time value after purchase.

Assets That Lose Value

Any asset that decreases in value is a wasting asset. A truck used for business purposes will decrease in value over time. 澳洲幸运5官方开奖结果体彩网:Accountants attempt to quantify the decrease by assigning a 澳洲幸运5官方开奖结果体彩网:depreciation schedule to recognize the loss.

A 澳洲幸运5官方开奖结果体彩网:term life insurance policy or a maintenance contract has a time of expiration and will expire worthless. A natural resource supply, such as a coal mine or oil well, has a limited lifespan and will decrease in value as the resource is extracted and the remaining supply is depleted. The owner calculates the 澳洲幸运5官方开奖结果体彩网:depletion rate to arrive at an expected life span.

Wasting Assets in Financial Markets

In the financial markets, options are the most common type of wasting asset. An option's value has two components: time value and 澳洲幸运5官方开奖结果体彩网:intrinsic value. As the option's expiration date nears, the time value gradually declines toward zero. At expiration, an option is worth only its intrinsic value. If it is 澳洲幸运5官方开奖结果体彩网:in the money (ITM), its value is the difference between the strike price and the underlying asset's price. If it is 澳洲幸运5官方开奖结果体彩网:out of the money (OTM), it expires worthless.

Other derivative contracts, such as futures, have a wasting component. As a futures contract nears expiration, the premium or discount decreases. Only the premium or discount wastes away, and the futures contract is worth something at expiration, unlike a🀅n OTM option.

Investors watch the expiration for any 澳洲幸运5官方开奖结果体彩网:derivative, especially options. Options strategies tend to be shorter-term, most expiring within one year. There are longer-term options called 澳洲幸运5官方开奖结果体彩网:long-term equity anticipation secur✃ities (LEAPS), which expire in one year or longer.

Example of an Option as a Wasting Asset

Assume a trader buys an option contract on the SPDR Gold Shares (GLD). If the trust trades at $127, they buy an 澳洲幸运5官方开奖结果体彩网:at-the-money (ATM) call option with a strike of $127. This option has no intrinsic value since it is ATM and not ITM. The option, which expires in two months, has a premium of $2.55.🌸 The option costs $255 for an option contract of 100 shares ($2.55 x 100 shares).

For the call buyer to make money, the price of GLD will need to rise above $129.55 ($127 + $2.55). This is the 澳洲幸运5官方开奖结果体彩网:breakeven point. If the price of GLD is below $127 at ex🍎piry, the option will expire worthless, and the trader will lose $255. The writer has captured the time value or wasting asset portion of the option while the buyer has lost it.

If GLD trades above the strike price at $128 at the option's expiry, the buyer will still lose money. They are fetching $1, but the option costs $2.55, so the loss is $1.55 or $155, which is the option writer's profit.

If the price of GLD is above $129.55 at an expiry of $132, then the buyer will cover the cost of the time value. The buyer's profit is $2.45 ($132 - $129.55), or $245 for the contract. The writer loses $245 if they wrote a 澳洲幸运5官方开奖结果体彩网:naked call option or has an opportunity cost of $245 if they wrote a 澳洲幸运5官方开奖结果体彩网:covered call.

The Bottom Line

A wasting asset, such as vehicles, non-renewable resources, and financial market options, declines in value over time. Accountants use depreciation formulas to account for the loss of tangible assets, like a work truck. In the financial market, traders can lose money as options move toward expiration and the investment veh🅘icle loses value.

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