Time Decay In Options
September 22, 2011 at 06:00 AM EDT
All options lose value as time passes. They are a wasting asset and will decay over time. Covered call writers have a decision to make as to which expiration date to write. Is it better to write near-term options and take advantage of rapid time decay, or write longer-term options to reduce transaction frequency (and costs) and get more downside protection? The answer is “it depends”; let’s take a look… Non-Linear Time Decay Time decay is a reduction in an option’s price caused by the passage of time. It normally accelerates as an option nears its expiration date. Typical Non-Linear Time Decay The steeper the blue line, the faster the time decay. Each day that passes causes a . . . → Read More: Time Decay In Options