How Does an Option’s Time to Expiration Affect Its Theta Value?
Theta's absolute value generally increases as an option approaches its expiration date, especially in the final 30-45 days. Options with a longer time to expiration have a smaller daily decay because the time value is spread out over more days.
As expiration nears, the remaining time value must decay rapidly, leading to a higher absolute Theta. This acceleration of decay is a key factor for options traders.
Glossar
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.
Gamma
Parameter ⎊ Representing the second derivative of an option's price with respect to the underlying asset price, this Greek measures the rate of change of Delta, indicating how quickly the hedge ratio needs to be adjusted.
Time Decay
Erosion ⎊ ⎊ Time decay, within cryptocurrency options and financial derivatives, represents the systematic reduction in an instrument’s extrinsic value as its expiration approaches.