Chart of the Day – Beware Options Time Decay

by Enis May 29, 2012 7:38 am • Commentary

My focus in the last week has been internally debating what to do with my many long June options.  I have expressed a variety of views through June premium (the largest position in my personal account is TLT calls), and while I like my directional bets, I am contending with the fact that I have less and less time for my trades to play out.  I am dealing with our pernicious friend, options time decay, or “theta” to professional traders.  (Here is Kristen’s primer on the option greeks.)

With June expiry now 2 and 1/2 weeks away, time decay is going to accelerate for at-the-money options.  Here’s the classic chart of options time decay for at-the-money options, courtesy of (looks much different for options far out-of-the-money):

The last 30 days, and even more importantly, the last 15 days are where you lose a good portion of your option’s time value.  As luck would have it, I happen to own at-the-money June options in several underliers.  For the site, we are specifically watching TLT, OXY, UUP and GOOG, and Dan actually has sold most of his long June option spreads in the last 2 weeks with this option decay in mind.  I have been a bit more stubborn, and am now left with a dilemma on what to do, since I still have confidence in my directional view (for example, that TLT is going to go higher), but that means little if TLT hangs around here for a few weeks before making its move.  At times like these, it probably makes sense to roll a portion of your premium to the next month, in this case July, to protect yourself against the chance of losing all your premium even when you got the direction correct.

Fortunately, there is a lot of significant economic data in the U.S. this week (ISM and Payrolls  on Friday the most important).  With that in mind, my plan of attack is to watch how my names behave today and tomorrow, and make a firm decision on Thursday as to whether I should sell my June options, roll them to July, or leave them alone.  Because of those data releases on Friday, I am relatively confident that my options won’t show significant decay over the next couple days.  The risk, though, is that the underlying moves directionally against me over the next 2 days, forcing me to make my decision on Thursday at worse levels.  I’m comfortable with that risk for now, but as always, it is subject to change as the markets give me more information.

Time decay management is an integral exercise for any options trader.  I will almost surely miss the best time to get out of my June options.  But a consistent plan keeps me in the driver’s seat over time, and the theta monster’s paws off the steering wheel.