The bane of the trader who buys options is the passage of time. He knows that every day his position is moving closer to expiration, the day after which the option ceases to exist. All of the time he paid for upfront, will be gone. And if the option is not in-the-money, so will the rest of his investment.
Look at the table below to reveal an investing shortcut that might just help “slow down” the effect of time on a long option position:
$100 Stock/ $100 Strike-price Call
| Days until expiration | Premium | Delta |
| 180 | 7.00 | .54 |
| 165 | 6.70 | .53 |
| 90 | 4.95 | .52 |
| 75 | 4.50 | .52 |
| 45 | 3.50 | .52 |
| 30 | 2.85 | .51 |
| 15 | 2.00 | .51 |
According to the table above, after 15 days, the 180-day call loses $0.30 (4.3%), the 90-day call loses $0.45 (9.1%), the 45-day call loses $0.65 (19%), and the 30-day call loses $0.85 (30%). The 30-day call loses almost one-third of its premium; a rate 3 times that of the 180-day call…over the same 15 days!
The longer-dated options have indeed “slowed down” the effect the passage of time has on premium decay.
The trade off, and there is always a trade off, is that the longer-dated options are more expensive and provide the trader less potential leverage. The Delta of an option tells us how much the price of the option is expected to change for a $1 change in the stock price. The Delta of the 180-day call is .54 representing a 7.7% change in that option’s $7.00 price. The Delta of the 45-day call is close, at .52, but this is 14.8% of the $3.50 paid.
If you trade options, know how time may affect your potential results and the trade offs you accept when you choose one strategy in favor of another.
