Why does an option lose time value faster as it approaches expiry
If you think about it, the value of an option comes from the chance that the price at the expiration date can exceed the strike price. As it gets closer to the expiration date, the chance is getting smaller, because there is simply not enough time for an out-of-money option to hit that strike. Therefore, the value of an option decays. "This is because volatility is cumulative and with less time there is less cumulative volatility. The time value and option value are tied to the value of the underlying.  The value of the underlying (stock) is quite influenced by volatility, the possible price movement in a given span of time.  Thirty days of volatility has a much broader spread of values than two days, since each day benefits from the possible price change of the prior days.  So if a stock could move up to +/- 1% in a day, then compounded after 5 days it could be +5%, +0%, or -5%.  In other words, this is compounded volatility. Less time means far less volatility, which is geometric and not linear.  Less volatility lowers the value of the underlying.  See Black-Scholes for more technical discussion of this concept. A shorter timeframe until option expiration means there are fewer days of compounded volatility.  So the expected change in the underlying will decrease geometrically.  The odds are good that the price at T-5 days will be close to the price at T-0, much more so than the prices at T-30 or T-90. Additionally, the time value of an American option is the implicit put value (or implicit call).  While an ""American"" option lets you exercise prior to expiry (unlike a ""European"" option, exercised only at expiry), there's an implicit put option in a call (or an implicit call in a put option).  If you have an American call option of 60 days and it goes into the money at 30 days, you could exercise early.  By contract, that stock is yours if you pay for it (or, in a put, you can sell whenever you decide). In some cases, this may make sense (if you want an immediate payoff or you expect this is the best price situation), but you may prefer to watch the price.  If the price moves further, your gain when you use the call may be even better.  If the price goes back out of the money, then you benefited from an implicit put.  It's as though you exercised the option when it went in the money, then sold the stock and got back your cash when the stock went out of the money, even though no actual transaction took place and this is all just implicit. So the time value of an American option includes the implicit option to not use it early.  The value of the implicit option also decreases in a nonlinear fashion, since the value of the implicit option is subject to the same valuation principles. But the larger principle for both is the compounded volatility, which drops geometrically." NL7 is right and his B-S reference, a good one.   Time decay happens to occur in a way that 2X the time gives an option 1.414X (the square root of 2) times the value, so half the time means about .707 of the value.  This valuation model should help the trader decide on exactly how far out to go for a given trade. Don´t forget that changing volatility will have an impact on the time value too! So at times it can happen that your time value is increasing instead of decreasing, if the underlying (market) volatility moves up strongly. Look for articles on option greeks, and how they are interdependent. Some are well explaining in simple language. "Not cumulative volatility. It's cumulative probability density. Time value isn't linear because PDFs (probability distribution function) aren't linear. It's a type of distribution e.g. ""bell-curves"") These distributions are based on empirical data i.e. what we observe. BSM i.e. Black-Scholes-Merton includes the factors that influence an option price and include a PDF to represent the uncertainty/probability. Time value is based on historical volatility in the underlying asset price, in this case equity(stock). At the beginning, time value is high since there's time until expiration and the stock is expected to move within a certain range based on historical performance. As it nears expiration, uncertainty over the final value diminishes. This causes probability for a certain price range to become more likely.  We can relate that to how people think, which affects the variation in the stock market price. Most people who are hoping for a value increase are optimistic about their chances of winning and will hold out towards the end. They see in the past d days, the stock has moved [-2%,+5%] so as a call buyer, they're looking for that upside. With little time remaining though, their hopes quickly drop to 0 for any significant changes beyond the market price. (Likewise, people keep playing the lottery up until a certain age when they're older and suddenly determine they're never going to win.)  We see that reflected in the PDF used to represent options price movements. Thus your time value which is a function of probability decreases in a non-linear fashion.  Option price = intrinsic value + time value At expiration, your option price = intrinsic value = stock price - strike price, St >= K, and 0 for St < K." Here's another attempt at explanation: it's basically because parabolas are flat at the bottom. Let me explain.  As you might know, the variance of the log stock price in Black Scholes is vol^2 * T, in other words, variance of the log stock price is linear in time to expiry. Now, that means that the standard deviation of your log stock price is square root in time. This is consequential.  For normally distributed random variables, in 68% of cases we end up within one standard deviation. So, basically, we expect our log stock price to be within something something times square root of T. So, if your stock has a vol of 16%, it'll be plus/minus 32% in 4 years, plus/minus 16% for one year, plus/minus 8% for 3m, plus/minus 4% for 3-ish weeks, and plus/minus 1% for a business day. As you see, the decay is slow at first, but much more rapid as we get closer.  How does the square root function look? It's a sideways parabola. As we come closer to zero, the slope of the square root function goes to infinity. (That is related to the fact that Brownian motion is almost surely no-where differentiable - it just shoots off with infinite slope, returning immediately, of course :-) Another way of looking at it is the old traders rule of thumb that an at-the-money option is worth approximately S * 0.4 * vol * sqrt(T). (Just do a Taylor expansion of Black Scholes). Again, you have the square root of time to expiry in there, and as outlined above, as we get closer to zero, the square root drops slowly at first, and then precipitously.
"I thought the other answers had some good aspect but also some things that might not be completely correct, so I'll take a shot. As noted by others, there are three different types of entities in your question:  The ETF SPY, the index SPX, and options contracts. First, let's deal with the options contracts.  You can buy options on the ETF SPY or marked to the index SPX.  Either way, options are about the price of the ETF / index at some future date, so the local min and max of the ""underlying"" symbol generally will not coincide with the min and max of the options.  Of course, the closer the expiration date on the option, the more closely the option price tracks its underlying directly.  Beyond the difference in how they are priced, the options market has different liquidity, and so it may not be able to track quick moves in the underlying. (Although there's a reasonably robust market for option on SPY and SPX specifically.) Second, let's ask what forces really make SPY and SPX move together as much as they do.  It's one thing to say ""SPY is tied to SPX,"" but how?  There are several answers to this, but I'll argue that the most important factor is that there's a notion of ""authorized participants"" who are players in the market who can ""create"" shares of SPY at will.  They do this by accumulating stock in the constituent companies and turning them into the market maker.  There's also the corresponding notion of ""redemption"" by which an authorized participant will turn in a share of SPY to get stock in the constituent companies. (See http://www.spdrsmobile.com/content/how-etfs-are-created-and-redeemed and http://www.etf.com/etf-education-center/7540-what-is-the-etf-creationredemption-mechanism.html) Meanwhile, SPX is just computed from the prices of the constituent companies, so it's got no market forces directly on it.  It just reflects what the prices of the companies in the index are doing. (Of course those companies are subject to market forces.) Key point: Creation / redemption is the real driver for keeping the price aligned.  If it gets too far out of line, then it creates an arbitrage opportunity for an authorized participant.  If the price of SPY gets ""too high"" compared to SPX (and therefore the constituent stocks), an authorized participant can simultaneously sell short SPY shares and buy the constituent companies' stocks.  They can then use the redemption process to close their position at no risk.  And vice versa if SPY gets ""too low."" Now that we understand why they move together, why don't they move together perfectly.  To some extent information about fees, slight differences in composition between SPY and SPX over time, etc. do play.  The bigger reasons are probably that (a) there are not a lot of authorized participants, (b) there are a relatively large number of companies represented in SPY, so there's some actual cost and risk involved in trying to quickly buy/sell the full set to capture the theoretical arbitrage that I described, and (c) redemption / creation units only come in pretty big blocks, which complicates the issues under point b. You asked about dividends, so let me comment briefly on that too.  The dividend on SPY is (more or less) passing on the dividends from the constituent companies. (I think - not completely sure - that the market maker deducts its fees from this cash, so it's not a direct pass through.)  But each company pays on its own schedule and SPY does not make a payment every time, so it's holding a corresponding amount of cash between its dividend payments.  This is factored into the price through the creation / redemption process.  I don't know how big of a factor it is though." There are some excellent responses to this question at the time of this post. I have had the greatest success writing 1-month options. The 2 main reasons are as follows: With little time to expiration as stated in the question the implied volatility of the option is dictating the premium. Looking for the highest premiums is a mistake because you are taking a conservative strategy and re-creating it into a high-risk strategy. My sweet spot is a 2-4% monthly return for my initial profit and then mastering management techniques to protect that return and even enhancing it. "This chart concerns an option contract, not a stock. The method of analysis is to assume that the price of an option contract is normally distributed around some mean which is presumably the current price of the underlying asset. As the date of expiration of the contract gets closer the variation around the mean in the possible end price for the contract will decrease. Undoubtedly the publisher has measured typical deviations from the mean as a function of time until expiration from historical data. Based on this data, the program that computes the probability has the following inputs: (1) the mean (current asset price) (2) the time until expiration (3) the expected standard deviation based on (2) With this information the probability distribution that you see is generated (the green hump). This is a ""normal"" or Gaussian distribution. For a normal distribution the probability of a particular event is equal to the area under the curve to the right of the value line (in the example above the value chosen is 122.49). This area can be computed with the formula:  This formula is called the probability density for x, where x is the value (122.49 in the example above). Tau (T) is the reciprocal of the variance (which can be computed from the standard deviation). Mu (μ) is the mean. The main assumption such a calculation makes is that the price of the asset will not change between now and the time of expiration. Obviously that is not true in most cases because the prices of stocks and bonds constantly fluctuate. A secondary assumption is that the distribution of the option price around the mean will a normal (or Gaussian) distribution. This is obviously a crude assumption and common sense would suggest it is not the most accurate distribution. In fact, various studies have shown that the Burr Distribution is actually a more accurate model for the distribution of option contract prices." "Seems like you are concerned with something called assignment risk. It's an inherent risk of selling options: you are giving somebody the right, but not the obligation, to sell to you 100 shares of GOOGL. Option buyers pay a premium to have that right - the extrinsic value. When they exercise the option, the option immediately disappears. Together with it, all the extrinsic value disappears. So, the lower the extrinsic value, the higher the assignment risk. Usually, option contracts that are very close to expiration (let's say, around 2 to 3 weeks to expiration or less) have significantly lower extrinsic value than longer option contracts. Also, generally speaking, the deeper ITM an option contract is, the lower extrinsic value it will have. So, to reduce assignment risk, I usually close out my option positions 1-2 weeks before expiration, especially the contracts that are deep in the money. edit: to make sure this is clear, based on a comment I've just seen on your question. To ""close out an options position"", you just have to create the ""opposite"" trade. So, if you sell a Put, you close that by buying back that exact same put. Just like stock: if you buy stock, you have a position; you close that position by selling the exact same stock, in the exact same amount. That's a very common thing to do with options. A post in Tradeking's forums, very old post, but with an interesting piece of data from the OCC, states that 35% of the options expire worthless, and 48% are bought or sold before expiration to close the position - only 17% of the contracts are actually exercised! (http://community.tradeking.com/members/optionsguy/blogs/11260-what-percentage-of-options-get-exercised) A few other things to keep in mind: certain stocks have ""mini options contracts"", that would correspond to a lot of 10 shares of stock. These contracts are usually not very liquid, though, so you might not get great prices when opening/closing positions you said in a comment, ""I cannot use this strategy to buy stocks like GOOGL""; if the reason is because 100*GOOGL is too much to fit in your buying power, that's a pretty big risk - the assignment could result in a margin call! if margin call is not really your concern, but your concern is more like the risk of holding 100 shares of GOOGL, you can help manage that by buying some lower strike Puts (that have smaller absolute delta than your Put), or selling some calls against your short put. Both strategies, while very different, will effectively reduce your delta exposure. You'd get 100 deltas from the 100 shares of GOOGL, but you'd get some negative deltas by holding the lower strike Put, or by writing the higher strike Call. So as the stock moves around, your account value would move less than the exposure equivalent to 100 shares of stock." $15 - $5 = $10 How did you possibly buy a put for less than the intrinsic value of the option, at $8.25 So we can infer that you would have had to get this put when the stock price was AT LEAST $6.75, but given the 3 months of theta left, it was likely above $7 The value of the put if the price of the underlying asset (the stock ABC) meandered between $5 - $7 would be somewhere between $10 - $8 at expiration. So you don't really stand to lose much in this scenario, and can make a decent gain in this scenario. I mean decent if you were trading stocks and were trying to beat the S&P or keep up with Warren Buffett, but a pretty poor gain since you are trading options! If the stock moves above $7 this is where the put starts to substantially lose value. "Below I will try to explain two most common Binomial Option Pricing Models (BOPM) used. First of all, BOPM splits time to expiry into N equal sub-periods and assumes that in each period the underlying security price may rise or fall by a known proportion, so the value of an option in any sub-period is a function of its possible values in the following sub period. Therefore the current value of an option is found by working backwards from expiry date through sub-periods to current time. There is not enough information in the question from your textbook so we may assume that what you are asked to do is to find a value of a call option using just a Single Period BOPM. Here are two ways of doing this: First of all let's summarize your information: Current Share Price (Vs) = $70 Strike or exercise price (X) = $60 Risk-free rate (r) = 5.5% or 0.055 Time to maturity (t) = 12 months Downward movement in share price for the period (d) = $65 / $70 = 0.928571429 Upward movement in share price for the period (u) = 1/d = 1/0.928571429 = 1.076923077 ""u"" can be translated to $ multiplying by Vs => 1.076923077 * $70 = $75.38 which is the maximum probable share price in 12 months time. If you need more clarification here - the minimum and maximum future share prices are calculated from stocks past volatility which is a measure of risk. But because your textbook question does not seem to be asking this - you probably don't have to bother too much about it yet. Intrinsic Value: Just in case someone reading this is unclear - the Value of an option on maturity is the difference between the exercise (strike) price and the value of a share at the time of the option maturity. This is also called an intrinsic value.  Note that American Option can be exercised prior to it's maturity in this case the intrinsic value it simply the diference between strike price and the underlying share price at the time of an exercise. But the Value of an option at period 0 (also called option price) is a price you would normally pay in order to buy it. So, say, with a strike of $60 and Share Price of $70 the intrinsic value is $10, whereas if Share Price was $50 the intrinsic value would be $0. The option price or the value of a call option in both cases would be fixed.  So we also need to find intrinsic option values when price falls to the lowest probable and rises to the maximum probable (Vcd and Vcu respectively) (Vcd) = $65-$60 = $5 (remember if Strike was $70 then Vcd would be $0 because nobody would exercise an option that is out of the money) (Vcu) = $75.38-$60 = $15.38 1. Setting up a hedge ratio:  h = Vs*(u-d)/(Vcu-Vcd) h = 70*(1.076923077-0.928571429)/(15.38-5) = 1 That means we have to write (sell) 1 option for each share purchased in order to hedge the risks. You can make a simple calculation to check this, but I'm not going to go into too much detail here as the equestion is not about hedging. Because this position is risk-free in equilibrium it should pay a risk-free rate (5.5%). Then, the formula to price an option (Vc) using the hedging approach is: (Vs-hVc)(e^(rt))=(Vsu-hVcu) Where (Vc) is the value of the call option, (h) is the hedge ratio, (Vs) - Current Share Price, (Vsu) - highest probable share price, (r) - risk-free rate, (t) - time in years, (Vcu) - value of a call option on maturity at the highest probable share price. Therefore solving for (Vc): (70-1*Vc)(e^(0.055*(12/12))) = (75.38-1*15.38) => (70-Vc)*1.056540615 = 60 => 70-Vc = 60/1.056540615 => Vc = 70 - (60/1.056540615)  Which is similar to the formula given in your textbook, so I must assume that using 1+r would be simply a very close approximation of the formula above. Then it is easy to find that Vc = 13.2108911402 ~ $13.21 2. Risk-neutral valuation: Another way to calculate (Vc) is using a risk-neutral approach. We first introduce a variable (p) which is a risk-neutral probability of an increase in share price. p = (e^(r*t)-d)/(u-d) so in your case: p = (1.056540615-0.928571429)/(1.076923077-0.928571429) = 0.862607107 Therefore using (p) the (Vc) would be equal: Vc = [pVcu+(1-p)Vcd]/(e^(rt)) => Vc = [(0.862607107*15.38)+(0.137392893*5)]/1.056540615 => Vc = 13.2071229185 ~ $13.21 As you can see it is very close to the hedging approach. I hope this answers your questions. Also bear in mind that there is much more to the option pricing than this. The most important topics to cover are: Multi-period BOPM Accounting for Dividends Black-Scholes-Merton Option Pricing Model" "people are willing to pay higher premiums for options when stocks go down. Obviously the time value and intrinsic value and interests rates of the option doesn't change because of this so the miscalculation remainder is priced into the implied volatility part of the formula.  Basically, anything that suggests the stock price will get volatile (sharp moves in either direction) will increase the implied volatility of the option. For instance, around earnings reports, the IV in both calls and puts in the nearest expiration dates are very high. When stocks go down sharply, the volatility is high because some people are buying puts for protection and others are buying calls because they think there will be a rebound move in the other direction. People (the ""sleep-at-night"" investors, not the derivatives traders ;) )  tend to be calm when stocks are going up, and fearful when they are going down. The psychology is important to understand and observe and profit from, not to quantitatively prove. The first paragraph should be your qualitative answer" Consider the black-scholes-merton result.  Notice that the expected value of the bond is its present value, discounted from the expiration date. The same is not applied to the price of the stock. The further in the future you go, the less value the bond carries because it's being discounted into oblivion. Now, looking at d1, as time tends towards infinity, so does d1. N(d1) is a probability.  The higher d1, the higher the probability and vice versa, so as time increases, the probability for S trends to 100% while K is discounted away. Note that the math doesn't yet fully model reality, as extremely long dated options such as the European puts Buffett wrote were traded at ~1/2 the value the model said he should've. He still had to take a GAAP loss: http://www.berkshirehathaway.com/letters/2008ltr.pdf "Simple answer: Breakeven is when the security being traded reaches a price equal to the cost of the option plus the option's strike price, assuming you choose to exercise it. So for example, if you paid $1.00 for,say, a call option with a strike price of $19.00, breakeven would be when the security itself reaches $20.00.  That being said, I can't imagine why you'd ""close out a position"" at the breakeven point.  You wouldn't make or lose money doing that, so it wouldn't be rational. Now, as the option approaches expiration, you may make adjustments to the position to reflect shifts in momentum of the stock.  So, if it looks as though the stock may not reach the option strike price, you could close out the position and take your lumps.  But if the stock has momentum that will carry it past the strike price by expiration, you may choose to augment your position with additional contracts, although this would obviously mean the new contracts would be priced higher, which raises your dollar cost basis, and this may not make much sense. Another option in this scenario is that if the stock is going to surpass strike price, it might be a good opportunity to buy additional calls with either later expiration dates or with higher strike prices, depending on how much higher you speculate the stock will climb.  I've managed to make some money doing this, buying options with strike prices just a dollar or two higher (or lower when playing puts), because the premiums were (in my opinion) underpriced to the potential peak of the stock by the expiration date.  Sometimes the new options were actually slightly cheaper than my original positions, so my dollar cost basis overall dropped somewhat, improving my profit percentages." Short answer: Liquidity. Well, you have to see it from an exchange's point of view.  Every contract they put up is a liability to them.  You have to allocate resources for the order book, the matching engine, the clearing, etc.  But only if the contract is actually trading they start earning (the big) money. Now for every new expiry they engage a long term commitment and it might take years for an option chain to be widely accepted (and hence before they're profitable).  Compare the volumes and open interests of big chains versus the weeklies and you'll find that weeklies can still be considered illiquid compared to their monthly cousins. Having said that, like many things, this is just a question of demand.  If there's a strong urge to trade July weeklies one day, there will be an option chain.  But, personally I think, as long as there are the summer doldrums there will be no rush to ask for Jul and Aug chains. I would make a change to the answer from olchauvin: If you buy a call, that's because you expect that the value of call options will go up. So if you still think that options prices will go up, then a sell-off in the stock may be a good point to buy more calls for cheaper. It would be your call at that point (no pun intended). Here is some theory which may help. An options trader in a bank would say that the value of a call option can go up for two reasons: The VIX index is a measure of the levels of implied volatility, so you could intuitively say that when you trade options you are taking a view on two components: the underlying stock, and the level of the VIX index. Importantly, as you get closer to the expiry date this second effect diminishes: big jumps up in the VIX will produce smaller increases in the value of the call option. Taking this point to its limit, at maturity the value of the call option is only dependent on the price of the underlying stock. An options trader would say that the vega of a call option decreases as it gets closer to expiry. A consequence of this is that if pure options traders are naturally less inclined to buy and hold to expiry (because otherwise they would really just be taking a view on the stock price rather than the stock price & the implied volatility surface). Trading options without thinking too much about implied volatities is of course a valid strategy -- maybe you just use them because you will automatically have a mechanism which limits losses on your positions. But I am just trying to give you an impression of the bigger picture. Options reflect expectations about the underlying asset, and options are commonly priced using the Black-Scholes model:  N(d1) and N(d2) are probability functions, S is the spot (current) price of the asset, K is the strike price, r is the risk free rate, and T-t represents time to maturity.  Without getting into the mathematics, it suffices to say that higher volatility or expectation of volatility increases the perceived riskiness of the asset, so call options are priced lower  and put options are priced higher. Think about it intuitively. If the stock is more likely to go downwards, then there's an increased chance that the call option expires worthless, so call options must be priced lower to accommodate the relative change in expected value of the option.  Puts are priced similarly, but they move inversely with respect to call option prices due to Put-Call parity. So if call option prices are falling, then put option prices are rising (Note, however, that call prices falling does not cause put prices to rise. The inverse relationship exists because of changes in the underlying factors and how pricing works.) So the option action signifies that the market believes the stock is headed lower (in the given time frame). That does not mean it will go lower, and option traders assume risk whenever they take a particular position. Bottom line: gotta do your own homework! Best of luck. An option gives you the option rather than the obligation to buy (or sell) the underlying so you don't have to exercise you can just let the option expire (so long it doesn't have an automatic expiry). After expiration the option is worthless if it is out of the money but other than that has no hangover. Option prices normally drop as the time value of the option decays. An option has two values associated with it; time value and exercise value. Far out of the money (when the price of the underlying is far from the strike price on the losing side) options only have time value whereas deep in the money options (as yours seems to be) has some time value as well as the intrinsic value of the right to buy (sell) at a low (high) price and then sell (buy) the underlying.  The time value of the option comes from the possibility that the price of the underlying will move (further) in your favour and make you more money at expiry. As expiry closes it is less likely that there will be a favourable mood so this value declines which can cause prices to move sharply after a period of little to no revaluing. Up to now what I have said applies to both OTC and traded options but exchange traded options have another level of complexity in their trading; because there are fewer traders in the options market the size of trade at which you can move the market is much lower. On the equities markets you may need to trade millions of shares to have be substantial enough to significantly move a price, on the options markets it could be thousands or even hundreds. If these are European style options (which sounds likely) and a single trading entity was holding a large number of the exchange traded options and now thinks that the price will move significantly against them before expiry their sell trade will move the market lower in spite of the options being in the money. Their trade is based on their supposition that by the time they can exercise the option the price will be below the strike and they will lose money. They have cashed out at a price that suited them and limited what they will lose if they are right about the underlying. If I am not correct in my excise style assumption (European) I may need more details on the trade as it seems like you should just exercise now and take the profit if it is that far into the money. I'm sorry, but your math is wrong.  You are not equally likely to make as much money by waiting for expiration. Share prices are moving constantly in both directions.  Very rarely does any stock go either straight up or straight down.  Consider a stock with a share price of $12 today.  Perhaps that stock is a bad buy, and in 1 month's time it will be down to $10.  But the market hasn't quite wised up to this yet, and over the next week it rallies up to $15. If you bought a European option (let's say an at-the-money call, expiring in 1 month, at $12 on our start date), then you lost.  Your option expired worthless. If you bought an American option, you could have exercised it when the share price was at $15 and made a nice profit. Keep in mind we are talking about exactly the same stock, with exactly the same history, over exactly the same time period.  The only difference is the option contract.  The American option could have made you money, if you exercised it at any time during the rally, but not the European option - you would have been forced to hold onto it for a month and finally let it expire worthless. (Of course that's not strictly true, since the European option itself can be sold while it is in the money - but eventually, somebody is going to end up holding the bag, nobody can exercise it until expiration.) The difference between an American and European option is the difference between getting N chances to get it right (N being the number of days 'til expiration) and getting just one chance.  It should be easy to see why you're more likely to profit with the former, even if you can't accurately predict price movement. "I'm guessing since I don't know the term, but it sounds like you're asking about the technique whereby a loan is used to gather multiple years' gift allowance into a single up-front transfer. For the subsequent N years, the giver pays the installments on the loan for the recipient, at a yearly amount small enough to avoid triggering Gift Tax. You still have to pay income tax on the interest received (even though you're giving them the money to pay you), and you must charge a certain minimum interest (or more accurately, if you charge less than that they tax you as if the loan was earning that minimum). Historically this was used by relatively wealthy folks, since the cost of lawyers and filing the paperwork and bookkeeping was high enough that most folks never found out this workaround existed, and few were moving enough money to make those costs worthwhile. But between the ""Great Recession"" and the internet, this has become much more widely known, and there are services which will draw up standard paperwork, have a lawyer sanity-check it for your local laws, file the official mortgage lien (not actually needed unless you want the recipient to also be able to write off the interest on their taxes), and provide a payments-processing service if you do expect part or all of the loan to be paid by the recipient. Or whatever subset of those services you need.  I've done this. In my case it cost me a bit under $1000 to set up the paperwork so I could loan a friend a sizable chunk of cash and have it clearly on record as a loan, not a gift. The amount in question was large enough, and the interpersonal issues tricky enough, that this was a good deal for us. Obviously, run the numbers. Websearching ""family loan""  will find much more detail about how this works and what it can and can't do, along with services specializing in these transactions. NOTE: If you are actually selling something, such as your share of a house, this dance may or may not make sense. Again, run the numbers, and if in doubt get expert advice rather than trusting strangers on the web. (Go not to the Internet for legal advice, for it shall say both mu and ni.)"