Accelerated Time Decay refers to options that have less than a month to maturity decay at an accelerated rate. As time passes, the probability of the stock making a major move decreases. A stock has a much greater chance of moving $10 in a three-month period of time than it does moving $10 in a one-week period of time. Option buyers need to monitor their positions and stock options that have less than one month of life need to be “rolled”. The option trader sells the current option position and buys an option with the same strike price that has more time. This “roll” will cost money to execute because the option that has more time will be more expensive. Assuming that the trader still has the same opinion of the stock, this will reduce his exposure to accelerated time decay. Option sellers like to capitalize on this characteristic. They want to sell out of the money options that are wasting away on a daily basis. Every day that the stock stays flat, the probability of a winning trade goes up. The option time decay gradually starts to become a factor two months from option expiration. During the last three weeks of life, the time decay accelerates in a parabolic manner.
Accelerated Time Decay
January 2, 20092 min read