Option Time Decay: Understanding Theta and Its Impact

Investing in options is difficult for one of two reasons; time decay and timing the markets. Since options have a time value attached to them, they are depreciating assets. To understand time value of options we look at one of the analytical calculations: theta.

Theta

Theta measures the price sensitivity of the option per lapsing day approaching expiration. Theta can be a negative value as well as positive, it most likely will be negative when the option is sold. No matter if the option is a call or put, the time value will create an extra expense that needs to be assessed in the value of the investment.

One way to take advantage of this time decay by creating an options strategy that sells options. Although this is one of the most risky investment strategies, options selling, when done right produces consistent returns in any market.

It's advisable to put your money with a professional money manager if you want to take advantage of options selling, because it is extremely risky.

However, if you do desire to take the risk, it is advisable to sell options with six weeks or less until expiration in order to take advantage of a rapid time decay.