Time Decay

There is one big problem that option buyers have and one that works in favor of the sellers, which is the idea of time decay. As the buyer of an option, no matter if this is a stock option or a commodity option, time decay is one problem that needs to be confronted every day. Time decay is the feature of options that explains the wearing away of its price, and this makes it lose some of its value every single day that goes by, no matter if the underlying stock or commodity moves or does not move. This can mainly be seen in the at the money ATM, and out of the money OTM options. Whenever an ATM or OTM option is purchased, the person is actually paying for something that does not have any real or intrinsic value to it. This person is actually purchasing something that is completely priced on the value of expectancy and the quantity of time that is left before expiration month. Every day that goes by and where the option remains to not be in the money, the premium is then priced again to a lower quantity. While it has less time to be profitable, the smaller the price of the option will be. This is exactly what time decay is. Those that have been option traders for a long time will know about this problem; however a lot of notices do not fully grasp the concept yet. Going back to the Greek concept known as theta; theta provides us the dollar quantity of the daily time decay for every single option. If you delve into the strategies that are involved in selling options, you will be able to see that time decay is a very big part in their success, and what brings down a lot of option buyers. One option will only lose a teensy bit of its value every day. For instance, if it is $2.50 today, then it will most likely be at $2.45 tomorrow and so forth. There is not any way to avoid this from happening.