Time value and time decay are two of the biggest differences between option contracts that have just a few trading days left until expiration and options that expire several weeks or even months in the future. For most short-dated options, time to expiration is never longer than seven full trading days while a standard option contact may have up to nine months remaining until expiration. When LEAPS are thrown into the discussion the time to expiration may be measured in years.
The time left until expiration will often have a direct impact on the value of an option contract, depending on the strike price of the option relative to where the underlying security is trading. Typically when there is more time left until expiration, there is more value for an option contract. However, the time to expiration also influences how the time value of an option changes as the contract approaches expiration. This is known as time decay.
Many option strategies are implemented to take advantage of time decay. The rapid acceptance and volume growth of short-dated options with only a few days left until expiration may be attributed to strategies that take advantage of or are able to avoid the influence of time decay. The majority of trades that include weekly options involve strategies that are based on either taking advantage of time decay or avoiding the impact of time decay on a position.
The rate of time decay is not uniform ...