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Time decay2 minute read
How does time decay change an option target?
Learn why the stock price required for an option target can rise as expiration approaches
Prepared by Mark · Primary sources below
Direct answer
Time decay removes time value as an option approaches expiration, so an unchanged stock price and volatility usually leave a long option worth less over time. To reach the same premium at a later checkpoint, the stock may need to move farther in the favorable direction or implied volatility may need to be higher
An option contains less possibility over time
Time value reflects the possibility that the underlying can move before expiration. As that window shrinks, a long call or put generally loses part of that value if the other pricing inputs do not change
Theta changes with current conditions
Theta is a model estimate based on the current inputs. It changes with moneyness, volatility, and time remaining, and decay commonly becomes more pronounced as expiration gets closer
The required move can become steeper
A target that looked reachable several weeks earlier may require a larger underlying move at a later checkpoint. Recalculate the target path when time passes or volatility changes because the earlier required price grows stale
Sources and further reading
See the condition behind your target
Choose a contract, target premium, and checkpoint to see what changes when time or implied volatility moves
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