Options Expiration Time Decay

During options expiration week time decay (my second brother) dramatically speeds up. For those who don’t know what time decay is: it’s the value give to an option for the time remaining in the contract term. As it nears the end of it’s contract life (expiration) the time value begins to “decay” rapidly. Here’s a typical time decay chart:

That’s why I always tell my coaching students that buying out-of-the-money options (long way from current market price) with less than 30 days to expiry will require substantial moves in the underlying market in order to become profitable. In english…It’s just plain STUPID! More often than not, markets will spend more time in a trading range than trending. Most times these out-of-the-money-options will expire worthless – this is where we come in as option writers and sellers.

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