Even if the economy goes in your favor, your choice of option may still be rendered valueless. A number of my current lives transactions have gone through this experience within the last week; originally, the entire portfolio was up as volatility improved and I had a couple minor wins on the road. Nonetheless, in the days that followed, as expiration approaches, the portfolio of extended options’ values gradually diminish.
This is exactly what time decay does to long option positions.
You are entitled to the benefit of minimizing investment risk, this is a leverage as an option buyer. Heading and getting the right direction is one thing, but there’s another risk which is employed contrary to the alternative buyer; time decay.
Options Are Not Time-Invincible Assets
All option contracts have a time limit, known as the expiry date Following this date, the alternative is either moved to the underlying asset or simply rendered worthless.
Option buyer is the person who determines whether or not to exercise this choice. Just like everything else which involves decision making, the longer you need to decide the better. On the contrary, as the window of opportunity to choose becomes smaller and smaller, the value of this decision dissipates with as time passes.
This is the right time to exercise call and put; with every trading day passes this “choice worth” becomes less and less. The value not only decreases, but accelerates as the expiry date closing in.