Been reading about theta decay and how options lose value over time. Some sources say it happens really fast, especially close to expiration.
Bought a few options last month and noticed they dropped in value even when the underlying moved in my favor. Is this theta decay actually that brutal or am I missing something here?
It gets brutal those last two weeks before expiration. I’ve watched drops happen lightning fast.
Theta decay is significant as options near expiration. The value decreases daily, and it becomes especially steep in the last week.
While it can seem stable initially, expect a sharp drop as the expiration date approaches.
Understanding this helps avoid surprises when trading options.
Lost $400 on Apple calls two years ago because I completely ignored theta decay. Stock went up 2% but my options still dropped 15% in three days.
Now I never hold options past 30 days to expiration. That final week is pure madness - time decay just eats everything alive.
Theta decay is a significant factor as you approach expiration. Options can lose value rapidly, even 5-10% a day, regardless of whether the underlying asset moves favorably. Essentially, options are built to lose value over time, which means if there are no substantial price movements, your investment diminishes quickly. It’s a common oversight among new traders, but understanding this can help you better manage your trades and expectations.
Theta decay accelerates in the final month. Expect a 20-30% daily loss in value during the last week. The stock must move quickly to counteract this decay.