The AI (ChatGPT) Stock Investing Handbook: Options - Time Decay

Here is the response from ChatGPT for the prompt options time decay entered on February 15, 2023

Options time decay, also known as theta decay, refers to the gradual reduction in the value of an options contract over time, all other things being equal. It is one of the primary drivers of options pricing.

As an option approaches its expiration date, its time value decreases. This is because there is less time for the option to move in the desired direction, and therefore less chance of the option being exercised profitably. The rate of time decay is represented by the option's theta, which measures how much the option's price will change for each day that passes.

Options with shorter expiration dates will generally have higher rates of time decay than options with longer expiration dates. This means that, all else being equal, an option with a shorter time to expiration will lose value more quickly than an option with a longer time to expiration.

Traders and investors can take advantage of options time decay by using strategies such as selling options that are close to expiration or buying options with longer expiration dates. However, it is important to understand the risks and potential rewards of these strategies, as options trading can be complex and involves a high degree of risk.

Expiration Date