What this lesson is about
Every option is racing a clock that only speeds up. The non-linear mechanics of decay, and why the odds structurally favor sellers over buyers, on average.
Part 1 of 2
An option's extrinsic value doesn’t drop steadily. It decays in a non-linear way. It loses value slowly when there's plenty of time left. But as expiration nears, that loss speeds up. This rapid decay is why so many options educators point out that a lot of options held to expiration end up worthless or unexercised. Time works against anyone holding a long option position every single day. And that pressure builds as the contract approaches its last trading day.
This trend shows that option sellers have a real edge over buyers, overall. Most sold options expire worthless, so sellers keep the entire premium in most cases. This is a real dynamic, but be careful. A high win rate on individual trades doesn’t mean the overall strategy is low risk.
Quick check
What happens to an option's extrinsic (time) value as expiration approaches, all else being equal?
Time decay is famously non-linear - an option loses value slowly at first when there's a lot of time left, then increasingly quickly as expiration nears.
Part 2 of 2
Quick check
Industry data on options held to expiration has generally shown what pattern?
This general pattern is widely cited in options education, though exact percentages vary across studies and time periods - the directional point (most held-to-expiration options don't pay off for the buyer) is the well-established takeaway.
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