What is Time Decay?

Time decay is the loss of value of an option as it approaches its expiration date. Which time frame is best for intraday option trading? There is no definitive answer to this question, as it depends on a number of factors, including the trader's objectives, risk tolerance, and market conditions. However, some experts recommend intraday option trading strategies that focus on either very short-term expiration dates (such as one hour or less) or longer-term expiration dates (such as one day or more).

Why do options lose value over time?

Assuming you are referring to options that are not close to expiration, there are a few reasons why options may lose value over time.

The first reason is what is called "time decay". Time decay is the rate at which an option's value declines as the option gets closer to expiration. This is due to the fact that the closer an option is to expiration, the less time there is for the underlying asset's price to move enough to make the option profitable.

The second reason is that as the underlying asset's price changes, the option's "implied volatility" changes as well. Implied volatility is a measure of how much the market thinks the underlying asset's price will move over the life of the option. If the market thinks the underlying asset's price will go up, the option's implied volatility will increase, and the option's price will increase as well. However, if the market thinks the underlying asset's price will go down, the option's implied volatility will decrease, and the option's price will decrease as well.

The third reason is that interest rates can also have an impact on the value of options. This is because when you buy an option, you are effectively buying the right to buy (or sell) the underlying asset at a certain price. This means that you are effectively borrowing money to buy the option, and the interest rate that you have to pay on that loan will have an impact on the option's price.

Do OTM options decay faster? Yes, OTM options generally decay faster than ATM or ITM options. The reason for this is that OTM options are more sensitive to changes in the underlying asset price than ATM or ITM options. This is because the strike price of an OTM option is further away from the current price of the underlying asset, so a small change in the asset price can have a large impact on the option price.

How do you find time decay in options? There are a few different ways to find time decay in options:

1. Theta - Theta is one of the "Greeks" in options trading, and it measures the rate of change in the price of an option with respect to time. In other words, theta represents the time decay of an option.

2. Implied Volatility - Another way to measure time decay is to look at the implied volatility of an option. Implied volatility is a measure of the market's expectations for the volatility of the underlying asset. Generally speaking, options with higher implied volatility will have higher time decay.

3. Historical Volatility - Historical volatility is a measure of the actual volatility of the underlying asset over a certain period of time. This can be used to estimate the time decay of an option, although it is not as accurate as implied volatility.

4. Probability of expiring in the money - Another way to measure time decay is to look at the probability of an option expiring in the money. This can be estimated using the Black-Scholes model or another options pricing model.

What happens if I don't sell options on expiry?

If you don't sell options on expiry, you will still have the options contract in your account. If the options contract is in-the-money, meaning the current market price of the underlying asset is higher than the strike price of the options contract, you may be assigned an exercise notice by the options exchange. This means that you are obligated to sell (or buy) the underlying asset at the strike price. If the options contract is out-of-the-money, meaning the current market price of the underlying asset is lower than the strike price of the options contract, the options contract will expire worthless and you will not be assigned an exercise notice.