Expected Time Value Decay of Options: Implications for Put‐Rolling Strategies

Assuming the underlying asset price remains constant, previous studies show that the time value of an option decays gradually at a rate that accelerates over time and peaks at the expiration date. Thus, a significant portion of time value is lost in the four weeks leading up to expiration. This paper shows the time value of currently at‐ or near‐the‐money options should be expected to decay at a rate that decreases over time. The time values of options that are currently deep‐in‐ or deep‐out‐of‐the‐money are expected to initially rise and then resume the normal decay pattern.