Why does an option lose time value faster as it approaches expiry
If you think about it, the value of an option comes from the chance that the price at the expiration date can exceed the strike price. As it gets closer to the expiration date, the chance is getting smaller, because there is simply not enough time for an out-of-money option to hit that strike. Therefore, the value of an option decays. "This is because volatility is cumulative and with less time there is less cumulative volatility. The time value and option value are tied to the value of the underlying.  The value of the underlying (stock) is quite influenced by volatility, the possible price movement in a given span of time.  Thirty days of volatility has a much broader spread of values than two days, since each day benefits from the possible price change of the prior days.  So if a stock could move up to +/- 1% in a day, then compounded after 5 days it could be +5%, +0%, or -5%.  In other words, this is compounded volatility. Less time means far less volatility, which is geometric and not linear.  Less volatility lowers the value of the underlying.  See Black-Scholes for more technical discussion of this concept. A shorter timeframe until option expiration means there are fewer days of compounded volatility.  So the expected change in the underlying will decrease geometrically.  The odds are good that the price at T-5 days will be close to the price at T-0, much more so than the prices at T-30 or T-90. Additionally, the time value of an American option is the implicit put value (or implicit call).  While an ""American"" option lets you exercise prior to expiry (unlike a ""European"" option, exercised only at expiry), there's an implicit put option in a call (or an implicit call in a put option).  If you have an American call option of 60 days and it goes into the money at 30 days, you could exercise early.  By contract, that stock is yours if you pay for it (or, in a put, you can sell whenever you decide). In some cases, this may make sense (if you want an immediate payoff or you expect this is the best price situation), but you may prefer to watch the price.  If the price moves further, your gain when you use the call may be even better.  If the price goes back out of the money, then you benefited from an implicit put.  It's as though you exercised the option when it went in the money, then sold the stock and got back your cash when the stock went out of the money, even though no actual transaction took place and this is all just implicit. So the time value of an American option includes the implicit option to not use it early.  The value of the implicit option also decreases in a nonlinear fashion, since the value of the implicit option is subject to the same valuation principles. But the larger principle for both is the compounded volatility, which drops geometrically." NL7 is right and his B-S reference, a good one.   Time decay happens to occur in a way that 2X the time gives an option 1.414X (the square root of 2) times the value, so half the time means about .707 of the value.  This valuation model should help the trader decide on exactly how far out to go for a given trade. Don´t forget that changing volatility will have an impact on the time value too! So at times it can happen that your time value is increasing instead of decreasing, if the underlying (market) volatility moves up strongly. Look for articles on option greeks, and how they are interdependent. Some are well explaining in simple language. "Not cumulative volatility. It's cumulative probability density. Time value isn't linear because PDFs (probability distribution function) aren't linear. It's a type of distribution e.g. ""bell-curves"") These distributions are based on empirical data i.e. what we observe. BSM i.e. Black-Scholes-Merton includes the factors that influence an option price and include a PDF to represent the uncertainty/probability. Time value is based on historical volatility in the underlying asset price, in this case equity(stock). At the beginning, time value is high since there's time until expiration and the stock is expected to move within a certain range based on historical performance. As it nears expiration, uncertainty over the final value diminishes. This causes probability for a certain price range to become more likely.  We can relate that to how people think, which affects the variation in the stock market price. Most people who are hoping for a value increase are optimistic about their chances of winning and will hold out towards the end. They see in the past d days, the stock has moved [-2%,+5%] so as a call buyer, they're looking for that upside. With little time remaining though, their hopes quickly drop to 0 for any significant changes beyond the market price. (Likewise, people keep playing the lottery up until a certain age when they're older and suddenly determine they're never going to win.)  We see that reflected in the PDF used to represent options price movements. Thus your time value which is a function of probability decreases in a non-linear fashion.  Option price = intrinsic value + time value At expiration, your option price = intrinsic value = stock price - strike price, St >= K, and 0 for St < K." Here's another attempt at explanation: it's basically because parabolas are flat at the bottom. Let me explain.  As you might know, the variance of the log stock price in Black Scholes is vol^2 * T, in other words, variance of the log stock price is linear in time to expiry. Now, that means that the standard deviation of your log stock price is square root in time. This is consequential.  For normally distributed random variables, in 68% of cases we end up within one standard deviation. So, basically, we expect our log stock price to be within something something times square root of T. So, if your stock has a vol of 16%, it'll be plus/minus 32% in 4 years, plus/minus 16% for one year, plus/minus 8% for 3m, plus/minus 4% for 3-ish weeks, and plus/minus 1% for a business day. As you see, the decay is slow at first, but much more rapid as we get closer.  How does the square root function look? It's a sideways parabola. As we come closer to zero, the slope of the square root function goes to infinity. (That is related to the fact that Brownian motion is almost surely no-where differentiable - it just shoots off with infinite slope, returning immediately, of course :-) Another way of looking at it is the old traders rule of thumb that an at-the-money option is worth approximately S * 0.4 * vol * sqrt(T). (Just do a Taylor expansion of Black Scholes). Again, you have the square root of time to expiry in there, and as outlined above, as we get closer to zero, the square root drops slowly at first, and then precipitously.
"A straddle is an options strategy in which one ""buys"" or ""sells"" options of the same maturity (expiry date) that allow the ""buyer"" or ""seller"" to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. IE: A long straddle would be: You buy a call and a put at the same strike price and the same expiration date. Your profit would be if the underlying asset(the stock) moves far enough down or up(higher then the premiums you paid for the put + call options) (In case, one waits till expiry) Profit = Expiry Level - Strike Price - (Premium Paid for Bought Options) Straddle" Just so I'm clear- the end result is a long call, and you think the stock is going up. There is nothing wrong with that fundamentally.  Be aware though: That's a negative theta trade. This means if your stock doesn't increase in price during the remaining time to expiration of your call option, the option will lose some of its value every day. It may still lose some of its value every day, depending on how much the stock price increases. The value of the call option just goes down and down as it approaches maturity, even if the stock price stays about the same. Being long a call (or a put) is a tough way to make money in the options market.  I would suggest using an out-of-the-money butterfly spread. The potential returns are a bit less. However, this is a cheap positive theta trade so you avoid time decay on the value of the option. "Number 2 cannot occur. You can buy the call back and sell the stock, but the broker won't force that #2 choice. To trade options, you must have a margin account. No matter how high the stock goes, once ""in the money"" the option isn't going to rise faster, so your margin % is not an issue.  And your example is a bit troublesome to me. Why would a $120 strike call spike to $22 with only a month left? You've made the full $20 on the stock rise and given up any gain after that. That's all. The call owner may exercise at any time. Edit: @jaydles is right, there are circumstances where an option price can increase faster than the stock price. Options pricing generally follows the Black-Scholes model. Since the OP gave us the current stock price, option strike price, and time to expiration, and we know the risk free rate is <1%, you can use the calculator to change volatility. The number two scenario won't occur, however, because a covered call has no risk to the broker, they won't force you to buy the option back, and the option buyer has no motive to exercise it as the entire option value is time premium." Nobody here really answered your question.  The custodian of the 401k determines what funds and investment options are available within that 401k.  So if they're eliminating company stock as an option then they can absolutely make you sell out of it.    You may be able to do an in service rollover and transfer your funds to an individual ira but that's not particularly common among 401k administrators.   Aside from that I'd ask why do you want to hold company stock anyway?  Generally I'd advise against this as its imposing a ton of risk on your financial future.  If your company tanks you're out of a job, which sucks.  But it sucks even more if your company tanks and your 401k loses a ton of value at the same time.   Edit: I see you asked who benefits as well.  It may just be a situation of no benefit at all.  Perhaps the plan didn't have enough people investing in company stock to make the option cost effective.  Maybe the administrator decided that allowing people to take on that amount of risk was not in their best interest(it's not).  Could be a ton of reasons but it's unlikely the company did so out of greed.  There isn't a lot of financial benefit for them there. "The answer to the question, can I exercise the option right away? depends on the exercise style of the particular option contract you are talking about. If it's an American-style exercise, you can exercise at any moment until the expiration date. If it's an European-style exercise, you can only exercise at the expiration date. According to the CME Group website on the FOPs on Gold futures, it's an American-style exercise (always make sure to double check this - especially in the Options on Futures world, there are quite a few that are European style): http://www.cmegroup.com/trading/metals/precious/gold_contractSpecs_options.html?optionProductId=192#optionProductId=192 So, if you wanted to, the answer is: yes, you can exercise those contracts before expiration. But a very important question you should ask is: should you? Option prices are composed of 2 parts: intrinsic value, and extrinsic value. Intrinsic value is defined as by how much the option is in the money. That is, for Calls, it's how much the strike is below the current underlying price; and for Puts, it's how much the strike is above the current underlying price. Extrinsic value is whatever amount you have to add to the intrinsic value, to get the actual price the option is trading at the market. Note that there's no negative intrinsic value. It's either a positive number, or 0. When the intrinsic value is 0, all the value of the option is extrinsic value. The reason why options have extrinsic value is because they give the buyer a right, and the seller, an obligation. Ie, the seller is assuming risk. Traders are only willing to assume obligations/risks, and give others a right, if they get paid for that. The amount they get paid for that is the extrinsic value. In the scenario you described, underlying price is 1347, call strike is 1350. Whatever amount you have paid for that option is extrinsic value (because the strike of the call is above the underlying price, so intrinsic = 0, intrinsic + extrinsic = value of the option, by definition). Now, in your scenario, gold prices went up to 1355. Now your call option is ""in the money"", that is, the strike of your call option is below the gold price. That necessarily means that your call option has intrinsic value. You can easily calculate how much: it has exactly $5 intrinsic value (1355 - 1350, undelrying price - strike). But that contract still has some ""risk"" associated to it for the seller: so it necessarily still have some extrinsic value as well. So, the option that you bought for, let's say, $2.30, could now be worth something like $6.90 ($5 + a hypothetical $1.90 in extrinsic value). In your question, you mentioned exercising the option and then making a profit there. Well, if you do that, you exercise your options, get some gold futures immediately paying $1350 for them (your strike), and then you can sell them in the market for $1355. So, you make $5 there (multiplied by the contract multiplier). BUT your profit is not $5. Here's why: remember that you had to buy that option? You paid some money for that. In this hypothetical example, you payed $2.30 to buy the option. So you actually made only $5 - $2.30 = $2.70 profit! On the other hand, you could just have sold the option: you'd then make money by selling something that you bought for $2.30 that's now worth $6.90. This will give you a higher profit! In this case, if those numbers were real, you'd make $6.90 - $2.30 = $4.60 profit, waaaay more than $2.70 profit! Here's the interesting part: did you notice exactly how much more profit you'd have by selling the option back to the market, instead of exercising it and selling the gold contracts? Exactly $1.90. Do you remember this number? That's the extrinsic value, and it's not a coincidence. By exercising an option, you immediately give up all the extrinsic value it has. You are going to convert all the extrinsic value into $0. So that's why it's not optimal to exercise the contract. Also, many brokers usually charge you much more commissions and fees to exercise an option than to buy/sell options, so there's that as well! Always remember: when you exercise an option contract, you immediately give up all the extrinsic value it has. So it's never optimal to do an early exercise of option contracts and individual, retail investors. (institutional investors doing HFT might be able to spot price discrepancies and make money doing arbitrage; but retail investors don't have the low commissions and the technology required to make money out of that!) Might also be interesting to think about the other side of this: have you noticed how, in the example above, the option started with $2.30 of extrinsic value, and then it had less, $1.90 only? That's really how options work: as the market changes, extrinsic value changes, and as time goes by, extrinsic value usually decreases. Other factors might increase it (like, more fear in the market usually bring the option prices up), but the passage of time alone will decrease it. So options that you buy will naturally decrease some value over time. The closer you are to expiration, the faster it's going to lose value, which kind of makes intuitive sense. For instance, compare an option with 90 days to expiration (DTE) to another with 10 DTE. One day later, the first option still has 89 DTE (almost the same as 90 DTE), but the other has 9 DTE - it relatively much closer to the expiration than the day before. So it will decay faster. Option buyers can protect their investment from time decay by buying longer dated options, which decay slower! edit: just thought about adding one final thought here. Probabilities. The strategy that you describe in your question is basically going long an OTM call. This is an extremely bullish position, with low probability of making money. Basically, for you to make money, you need two things: you need to be right on direction, and you need to be right on time. In this example, you need the underlying to go up - by a considerable amount! And you need this to happen quickly, before the passage of time will remove too much of the extrinsic value of your call (and, obviously, before the call expires). Benefit of the strategy is, in the highly unlikely event of an extreme, unanticipated move of the underlying to the upside, you can make a lot of money. So, it's a low probability, limited risk, unlimited profit, extremely bullish strategy." "You'd need to know the delta and the theta of the option. You can either calculate them yourself using a model like Black-Scholes (assuming you have a market price and can imply a volatility, and know the other factors that go into the model) or, you can see if your broker quotes ""greeks"" as well (mine does). The delta is the sensitivity (rate of change in value) to the underlying stock price, and the theta is the sensitivity to time passing (usually expressed in $/day).  So if your option has a delta of .5 and a theta of -.04, when one day passes and the underlying stock goes up $3, the option will gain roughly $1.50 due to the underlying stock price and lose $0.04 due to time passing." Let's say a stock trades at $100 right now, and you can buy a $100 call option. When you buy the call option (and the money you paid is gone), one of two things can happen: The share price goes up, or the share price goes down.  If the share price goes up, you profit. If the share price goes down, you don't lose! Because once the shares are below $100, you don't exercise the call option, and you don't lose any money.  So if you have a share that is rock solid at $100, you don't make money. If you have a share where the company owner took some ridiculous risk, and the shares could go to $200 or the company could go bankrupt, then you have a 50% chance to make $100 and a 50% chance to not lose anything. That's much more preferable. An expired option is a stand-alone event, sold at $X, with a bought at $0 on the expiration date.  The way you phrased the question is ambiguous, as 'decrease toward zero' is not quite the same as expiring worthless, you'd need to buy it at the near-zero price to then sell another covered call at a lower strike.  Edit - If you entered the covered call sale properly, you find that an in-the-money option results in a sale of the shares at expiration. When entered incorrectly, there are two possibilities, the broker buys the option back at the market close, or you wake up Sunday morning (the options 'paperwork' clears on Saturday after expiration) finding yourself owning a short position, right next to the long. A call, and perhaps a fee, are required to zero it out.  As you describe it, there are still two transactions to report, the option at $50 strike that you bought and sold, the other a stock transaction that has a sale price of the strike plus option premium collected.