How To Avoid Time Decay In Options
Avoiding time decay (also called theta decay) in options trading means managing or minimizing the loss in value that occurs as an option nears its expiration—especially if it’s out-of-the-money (OTM). Time decay mostly affects option buyers, and increases exponentially as expiration approaches.
📉 What Is Time Decay?
Time decay is the gradual erosion of an option’s extrinsic value (the part not based on intrinsic value) as the expiration date nears.
- Theta is the Greek that measures time decay.
- A theta of -0.05 means the option loses $5 per day per contract, all else equal.
🧠 How to Avoid or Minimize Time Decay
✅ 1. Trade Options with More Time (Longer Expirations)
- Buy options with 30–90 days to expiration to reduce daily theta erosion.
- Time decay is slow early on, but speeds up dramatically in the final 2–3 weeks.
📊 Rule of thumb: The closer to expiration, the faster time decay accelerates.
✅ 2. Avoid Holding Options Close to Expiration
- Close or roll your position well before expiration—especially if it’s out-of-the-money.
- Even strong directional moves may not offset rapid time decay in the final days.
✅ 3. Buy Deep-In-The-Money (DITM) Options
- DITM calls and puts have higher intrinsic value and less extrinsic value (so less theta).
- These behave more like the underlying asset and decay less rapidly.
✅ 4. Use Spread Strategies (Theta-Neutral or Theta-Positive)
Instead of buying naked options, use spreads to offset or benefit from time decay:
| Strategy | Time Decay Impact |
|---|---|
| Credit spreads (e.g., bull put spread) | Benefit from time decay |
| Debit spreads (e.g., call spread) | Time decay partially offset |
| Calendars/Diagonals | Take advantage of time value differences |
✅ 5. Sell Options Instead of Buying Them
- Option sellers collect premium and benefit from time decay.
- Examples:
- Covered calls
- Cash-secured puts
- Iron condors
⚠️ Selling options comes with higher risk, so make sure you understand the tradeoffs.
✅ 6. Trade Around Catalysts
- Enter trades when the stock is likely to move sharply (e.g., before earnings, news).
- Sharp moves increase implied volatility, which can offset time decay.
🧪 But beware: after events like earnings, IV crush can still hurt the value of options.
🚫 Common Mistakes That Accelerate Time Decay Losses
| Mistake | Why It’s Costly |
|---|---|
| Buying short-dated OTM options | Rapidly lose value with no movement |
| Holding till expiration | Maximum decay near end |
| Ignoring theta when planning | Underestimating time value erosion |
✅ Summary: Best Ways to Minimize Time Decay
| Strategy | Benefit |
|---|---|
| Use longer-dated options | Slows down time decay |
| Close trades early | Avoids rapid theta loss |
| Buy DITM options | Less extrinsic value to decay |
| Use spreads | Partially or fully offsets theta |
| Sell options (carefully) | Profits from time decay |