Time decay is another consideration. You see, time value of an Option contract does not decrease proportionately over time. The time value of an Options contract decreases in a manner like this:
So you see, the time value decreases at a faster rate when it is less than 30-60 days to Option expiration. Fastest when it is less than 30 days. Meaning, if you buy an Option , during the last 30-60 days, besides praying for the stock price to move in the direction and amount you hope for, you got make sure the stock price moves fast. If not, you will be losing significant time value! That is, even if the stock price remained the same as the price you bought the Option at, when it is less than 30 days to Option expiration, you will see your Option dropping value drastically. And you are losing money even though the stock price has not changed!
So, the general rule of thumb is:
- Buy Options with minimal 60-90 days to expiration when you expect the stock price to move within a few days or a few weeks.
- Try to sell to close your Option trades when there is only 30 days left to expiration.
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