time decay
Time Decay is the way an option loses value simply because days are passing, even if the share price has not moved one bit.
In plain English
Here is the surprising part. You can be completely right about a share price going nowhere, and still lose money every single day, just because the calendar keeps turning.
That is what happens to someone holding an option. An option is a contract that gives you the right to buy or sell a share at a set price before a certain date, and part of what you pay for it is simply the time left on the clock. Every day that passes without the share price moving in your favour, a small slice of that value calmly evaporates, whether you are watching or not.
Say a trader in Lagos buys an option betting that a bank stock on the NGX will rise before the contract expires in thirty days. If the share price sits still for two weeks, the trader has not lost because the stock fell. The trader has lost because time itself ran out on the bet, and the option is worth less simply for being fifteen days closer to expiry with nothing to show for it.
This decay does not move in a straight line. It crawls slowly at first, then speeds up sharply in the final days before expiry, like a phone battery that drains fine for hours and then dies fast in the last stretch. This is why option sellers, the people collecting the premium rather than paying it, often like time on their side. Every calm day is a small win for them.
A Nigerian in London trading contracts for difference or options through an app back home should treat an expiry date the way one treats a visa deadline. It is not something to notice only when it arrives. It is ticking down from the moment the contract is signed.
Chidi buys a call option on a stock for ₦8,000, expecting the price to jump within three weeks. The price barely moves for ten days, and even though nothing bad has happened, the option is now worth only ₦5,500, because ten days of time value simply melted away.
Questions people ask
Does time decay affect ordinary shares too?
No. If you simply own shares in Dangote Cement or a UK company, there is no expiry date and no clock working against you. Time decay only applies to options and similar contracts that have a fixed expiry date built into them.
Can time decay ever work in my favour?
Yes, if you are the one who sold the option rather than bought it. As the seller, you collected payment upfront, and every day that passes without the buyer's bet paying off is value slipping away from them and effectively staying in your pocket.
Why does the loss speed up near the expiry date?
Because there is less and less time left for the share price to make the big move the buyer is hoping for, so each remaining day carries more weight. The last week before expiry is usually where the sharpest losses in time value happen.
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