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Why bought options lose value while you wait (theta)
Intermediate · 5 min read
Before expiry an option's premium has two parts: intrinsic value (what it would be worth now) and time value (what buyers pay for the chance of a bigger move before expiry). Time value always reaches zero at expiry.
Theta
The daily loss of time value is called theta. It is not even: an option with weeks left loses a little each day, and the same option in its final days loses time value fast. Out-of-the-money options are made of nothing but time value, so they can lose most of their price in the last days even if the underlying does not move against you.
What it means for a buyer
- Being right on direction is not enough — the move has to come soon and be big enough to beat the decay.
- A sideways market is a losing market for the option buyer and a winning one for the seller.
- Short holding periods and clear exits matter more than for shares: waiting costs money every day.
And volatility
Time value also depends on implied volatility. After a big expected event — results, a policy announcement — volatility often drops, and premiums can fall even when the underlying moves the “right” way.
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