time decay
- Thread starter met1989
- Start date
Robert Morse
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In general for day trading, I'd look toward options that are about a week out, as they are often more liquid with tighter markets than 30 days.
I suggest you read up on Theta.
Here is a start: http://www.theoptionsguide.com/theta.aspx
Note however that Robert made a valid point on liquidity as well
Keep your money in the bank until you have a clue.
"...If the setup is correct" suggests you are clueless.
You have not posted what underlying you're trading.
You have not posted whether call or put, or whether you intend ITM, ATM, or OTM.
You have not posted whether you're going lone or in a spread.
Each of these things matters.
In answer to your question, this would occur in the last minute before the option stops trading when, no matter its value, it loses 100% of it.
Lastly, note the value decay of OTM options depicted below -- nearly linear, until [perhaps] the last week, when it slows to (in some cases) zero -- you'll see that depicted in a doubling ("easy!") of IV for that region of strikes. "FYI" and all that.
You've asked a single question which deserves a chapter or two by way of answer. On this topic, there are lots of good resources on the net. Get busy.
"...If the setup is correct" suggests you are clueless.
You have not posted what underlying you're trading.
You have not posted whether call or put, or whether you intend ITM, ATM, or OTM.
You have not posted whether you're going lone or in a spread.
Each of these things matters.
In answer to your question, this would occur in the last minute before the option stops trading when, no matter its value, it loses 100% of it.
Lastly, note the value decay of OTM options depicted below -- nearly linear, until [perhaps] the last week, when it slows to (in some cases) zero -- you'll see that depicted in a doubling ("easy!") of IV for that region of strikes. "FYI" and all that.
You've asked a single question which deserves a chapter or two by way of answer. On this topic, there are lots of good resources on the net. Get busy.
Last edited:
While I agree with your assessment of the OP, it is a decent question I'll rephrase. If an option's option value is going to decay X in a day (I hear people call that theta decay but the theta itself isn't decaying so that's not quite accurate), does it decay by X/24 each hour? Or X/6.5 during each of the market hours and 0 the rest of the day? Or X/3 in the opening 3 minutes, X/3 in the closing 3 minutes, X/3 in the rest of the trading day, and 0 overnight? The last time I see it discussed here (https://www.elitetrader.com/et/threads/intraday-time-decay.175788/page-5) it devolved into a put/call parity discussion with a little "you're focusing on the wrong thing" and never answered the question. There has been some research done on this, I'll throw out the following paper (http://mmss.wcas.northwestern.edu/thesis/articles/get/959/MMSS Thesis.pdf) as food for thought, this graph comes from page 12Keep your money in the bank until you have a clue.
"...If the setup is correct" suggests you are clueless.
You have not posted what underlying you're trading.
You have not posted whether call or put, or whether you intend ITM, ATM, or OTM.
You have not posted whether you're going lone or in a spread.
Each of these things matters.
In answer to your question, this would occur in the last minute before the option stops trading when, no matter its value, it loses 100% of it.
Lastly, note the value decay of OTM options depicted below -- nearly linear, until [perhaps] the last week, when it slows to (in some cases) zero -- you'll see that depicted in a doubling ("easy!") of IV for that region of strikes. "FYI" and all that.
You've asked a single question which deserves a chapter or two by way of answer. On this topic, there are lots of good resources on the net. Get busy.
In answer to your question, this would occur in the last minute before the option stops trading when, no matter its value, it loses 100% of it.
Lastly, note the value decay of OTM options depicted below -- nearly linear, until [perhaps] the last week, when it slows to (in some cases) zero -- you'll see that depicted in a doubling ("easy!") of IV for that region of strikes. "FYI" and all that.
[/QUOTE]
I was going to say how fast it decays really depends on its moneyness which is in turn determined by various factors. If an option is out of money, it could lose all of its value way earlier than the last minute before its expiration.
Lastly, note the value decay of OTM options depicted below -- nearly linear, until [perhaps] the last week, when it slows to (in some cases) zero -- you'll see that depicted in a doubling ("easy!") of IV for that region of strikes. "FYI" and all that.
[/QUOTE]
I was going to say how fast it decays really depends on its moneyness which is in turn determined by various factors. If an option is out of money, it could lose all of its value way earlier than the last minute before its expiration.
Many S&P front expiry options will go to the minimum non-zero value of 5¢ 5-8 market days before they die. And they will sit right there -- NOT go to 0¢, NOT go to 0 trades, through expiration. Their theta has turned from visibly negative -- to a nearly (or completely) flat line with slope 0. It happens -- and in the most heavily traded options, Friday after Wednesday after Monday after week after month. So, not untypical; not hard to find.
So there is another dimension to the OP's question. The options market and pricing is relatively efficient - some would say very efficient. Theta, in part, is what you pay to get Gamma. Always look at the Greeks on a percentage basis. The more erosion you incur the more Gamma you get and that could be a positive for your strategy/trade. This is a broad brushstroke and there are more factors to consider -is volatility uniform across expirations, how much rounding and spread are there in low priced options, will I exit a longer dated option early? Get a model off the internet and run the scenario you forecasting. It can also be very challenging to exit some of the low price stuff.