Happy Thursday, traders…

Ben here. 

Options trading essentially comes down to two factors — direction and time.

But time is the real “value” you’re paying for…

The more time is left before your contract’s expiration date, the higher its extrinsic value (and overall premium) will be.

This is what creates the biggest difference between options and stocks. Stocks never expire, you can hold them forever.

Meanwhile, options lose value as time passes, a key concept known as time decay (a.k.a. theta).

When trading options, you need to a) pick the right direction and b) determine when the price swing will happen.

This is why time decay is so critical in options trading. It refers to the way an option loses value as it gets closer to its expiration date. 

But more importantly, understanding time decay can help you make better trading decisions — and potentially massive profits.

With that in mind, let me show you how considering time decay led me to nail a 100% gain in less than three hours…*

Why Time Decay Exists

Time decay is the gradual reduction in the value of an option as it moves toward its expiration date. 

Every day that passes, the option becomes less valuable (if all other factors remain the same). 

This happens because the chance of the stock price moving in a favorable direction gets smaller as time runs out.

When you buy an option, you are paying for the chance to buy or sell a stock at a certain price before a specific date. 

The more time left before that date, the more chances the stock has to move in a way that makes the option profitable.

As time passes, there is less opportunity for the stock to move in your favor. As a result, the option becomes less valuable. 

If the expiration date is near and the stock hasn’t moved much, the market assumes the option is less likely to be worth anything by the expiration date. This is why time decay exists.

How Time Decay Affects Option Prices

Time decay directly impacts the price of both call options (which give you the right to buy a stock) and put options (which give you the right to sell a stock). 

For option buyers, time decay is always working against you because each day, the option loses a bit of its value. 

This means you need the stock to move in your favor quickly enough to make up for the value lost to time decay.

For option sellers (e.g. the market makers who sell you contracts) time decay works in their favor. 

When you buy an option, the person who sold it to you collects a premium (the price paid by the buyer). 

As time passes and the option loses value, the seller keeps the premium, which means they profit from the option losing its value over time.

Closer to Expiration? Faster Time Decay…

Time decay speeds up as the option gets closer to expiration. 

In the early days of a contract’s lifespan, the value decreases slowly. But as the expiration date gets closer, time decay starts to accelerate.

For example, if you buy an option 90 days from its expiration date, you may only lose a small amount of value each day. But in the last 30 days, the time decay will rapidly eat up your premium. 

An option with only a few days until expiration can lose value quickly, sometimes by several dollars a day, especially if the stock price hasn’t moved much.

This is why options that are about to expire are risky to hold if the stock price hasn’t moved yet. 

Time decay will quickly eat away any remaining value. If you’re not careful, you could lose money even if the stock moves in the right direction, just because time ran out.

Different Options? Different Time Decay…

Time decay doesn’t affect all options in the same way…

At-the-money (ATM) options, where the stock price is close to the option’s strike price, are the most affected by time decay. These options have the highest potential to become profitable or worthless, so their value is very sensitive to time decay.

In-the-money (ITM) options, which already have some built-in value, are less affected by time decay because they’re more likely to end up profitable. 

Out-of-the-money (OTM) options are far from being profitable, so they’re also less affected by time decay until the expiration date gets closer.

While no single rule applies to all trades, I tend to buy options that are just slightly OTM. 

These contracts are close enough to the money to be dangerous, while still cheap enough to provide a lot of potential upside. 

And that’s exactly what I did on a HUGE winner this week…

How Time Decay Helped Me Make 100% in 3 Hours

Understanding time decay can help you make smarter choices (and larger profits) in options trading. 

For example: Yesterday, I bought Nvidia Corporation (NASDAQ: NVDA) 9/13/2024 $112 calls at $1.20 on a pullback:

Notice that I bought contracts expiring three days from the time of entry. With only 72 hours on the contracts, they had incredibly rapid time decay.

So, why did I choose these contracts specifically? Because contracts with fast time decay will also increase at a greater pace than longer-dated contracts.

I knew this would be a quick trade, with stops near $110, and that if the stock moved up, the weekly contracts would gain more than any other calls.

I exited my final scale yesterday afternoon for $2.40 — a 100% gain in less than three hours:*

But had I bought longer-dated contracts, I wouldn’t have made anywhere near 100%. 

This is a perfect example of why understanding time decay can lead to bigger gains. 

And speaking of big gains, let’s look at:

💰The Biggest Smart-Money Bets of the Day💰

• $5.6 million bullish bet on XLF 09/20/2024 $40 puts @ $3.75 avg. (seen on 9/11)

• $4.9 million bullish bet on AMZN 10/18/2024 $175 calls @ $6.12 avg. (seen on 9/11)

• $2.1 million bearish bet on XLB 10/18/2024 $86 calls @ $0.85 avg. (seen on 9/11)

*Past performance does not indicate future results