July 20th, 2023

Taking Advantage of Options Premium “Crush”

When selling options for income, one important factor to consider is what’s known as theta, or time decay.

Theta is one of the option Greeks, and it measures the rate at which an option will theoretically decline in price as it approaches its expiration date.

As you can see in the graphic below, theta accelerates the closer an option gets to expiration, with the most rapid decay coming in the last 30 days before expiration.

As option sellers, theta decay is our friend. In fact, we have a catchier name for it. We call it “options premium crush.”

The more premium that leaks out of an option we’ve sold, the more of the maximum potential profit we can pocket. Because we typically sell shorter-term options with one to three weeks to expiration, we maximize the advantage theta decay provides.

Yet, even though options premium crush will be greatest in the days and even hours leading up to expiration, that doesn’t mean we will stay in a position just to wring out the last few cents of premium. Doing so can come back to bite you if you get a late-week reversal.

Plus, you can always turn around and put your cash back to work with new trades that offer a greater return on capital than hanging in a trade till the bitter end.

Trade Smart, 

Emily Norris
Managing Editor, Traders ReserveT