Lesson #1: What are Options? / Lesson #2: How options are priced / Lesson #3: Calls and Puts / Lesson #4: How options increase in value / Lesson #5: Times and Options / Lesson #6: Strike Price / Lesson #7: In, At and Out of the Money / Lesson #8: Option Risks / Lesson #9: Writing Options
When purchasing an option, time is a major factor in the initial pricing and the ultimate value of an option.
Expiration Date:
When you buy an option, one the major factors that you need to determine is the expiration date for the contract. You will be given a choice of several months to choose from. For example, if you decide to purchase an option on January 9, 2006, you will have a choice of selecting a contract that expires in January 2006, February 2006 March 2006 and so on.
The expiration date is always the third Friday of the month selected. So if you choose the January 2006 option, it expired January 20, 2006 and in this particular instance, your option would have had a 11 day life. The third Friday in February 2006, fell on the 17th. The option in this case has a 39 day life.
As mentioned in Lesson 1, if your option is in a positive position, you can take your profit out by either selling the option before expiration date or exercising it. If you decide to sell the option, you must do this before or at the expiration date.
Time is money:
Time is a valuable component of any option. The more time you have on your option, the more expensive it will be to purchase. In our above illustration the option with a 39 day life was more expensive than the option with only an 11 day shelf life. The difference between the different prices will be simply the value of time.
Another timing issue:
One additional factor, is that unlike stock's, you can not buy or sell options after hours. But despite the fact that you cant trade them after hours or week ends, your option it is steadily losing value over these times and days.
Time is your enemy when you buy the options, however your friend when you write the option:
When you purchase your option, you have to realize that time is your enemy. As soon as you buy it the clock starts ticking down towards the expiration date. With each passing day, the option will lose one more day of value (THETA). As the option draws closer to the expiration date, the daily time loss actually increases. For the Option writers this is a blessing see Option Writing Lesson.