One risk of options investing is time decay, or
the fact that the value of an option decreases as
expiration
nears. Options are wasting assets, which means that they have
no value after a certain date. Stockholders, even if their shares
drop dramatically in value, can hold their investment for many
years. As long as the company exists, there is the potential for
shares to regain value.
But if the stock or index underlying an option
moves in a direction you didn't anticipate, there is a limited
amount of time in which it can change directions. Once the option
expires
out
of the money
it is worthless, and if you're
the holder you will have lost the entire
premium
you paid. Options writers take advantage of this, and usually
intend for the contracts they write to expire unexercised and
out of the money.
