Time Decay

[Edosa360]

Hello guys can someone help me to understand why time decay is higher at the money option? I need the intuition behind this. I understand the graph of the time decay but can understand the financial intuition behind.

 

[Option_Attack]

ATM options have the most extrinsic value. So Theta, in dollars per day, will be higher because there is more money to decay. Maybe some of the option experts here can give better insight, but this is how I think of it.

 

[newwurldmn]

Hello guys can someone help me to understand why time decay is higher at the money option? I need the intuition behind this. I understand the graph of the time decay but can understand the financial intuition behind.

An option that is at the money-ish has the highest sensitivity to stock movements (ie Gamma). Theta is the cost of having Gamma.

Time value is the sum of the expected theta which will be highest for an at the money option.

 

[Poljot]

Because there is no intrinsic value in ATM option but there is the greatest uncertainty regarding its expiry In OR Out of money, hence time value is the most expensive.

 

[anycolour]

I hate time decay. Trading options has killed me in the past. Should I give up on options? Or is there a way to trade that avoids time decay? If so, how? Just do verticals?

 

[Edosa360]

Because there is no intrinsic value in ATM option but there is the greatest uncertainty regarding its expiry In OR Out of money, hence time value is the most expensive.

Please why there is the greatest uncertainty?

 

[longandshort]

Best way to see it is that as you move forward in time, the likelihood of an outcome increases or decreases. Options are priced probabilistically, and strike prices should be seen within a probability density framework . I recommend reading John Hull's textbook on options (called "the bible" on derivs trading desks) to get a good grasp on the underlying mechanisms.

 

[Edosa360]

Best way to see it is that as you move forward in time, the likelihood of an outcome increases or decreases. Options are priced probabilistically, and strike prices should be seen within a probability density framework . I recommend reading John Hull's textbook on options (called "the bible" on derivs trading desks) to get a good grasp on the underlying mechanisms.

John Hull is not giving the intuition behind this. Just give the graph of time decay respect to maturity

 

[longandshort]

Prices accrete or erode as the probability of an event rises as you move forward in time. "time decay" is a misnomer.

 

[GuerrillaTrading]

I hate time decay. Trading options has killed me in the past. Should I give up on options? Or is there a way to trade that avoids time decay? If so, how? Just do verticals?

You can try selling premium instead of buying premium. Credit spreads or Covered puts or calls. Time is your enemy only if you're a buyer of options.