You might be familiar with the concept of time decay in option contracts. If not, it is the rate of decline in the price of an options contract due to the passage of time. An important thing to remember is that time decay accelerates as an option's time to expiration draws closer since there's less time to realise a profit from the trade.
What this means is that even if the underlying security (NIFTY, BANK NIFTY etc.) opens the next trading day at the same price as it closed last, your options’ value will have declined due to time decay, especially in the last 5-7 days before an expiry.
The underlying security may now have to move up or down a considerable amount for you to breakeven.
Hence, in the last 5-7 days before an options’ expiry, it is not a good idea to buy and hold options overnight.
There is also an additional risk of a gap up or a gap down which could result in your stop loss order not getting triggered, in case you had placed one. The probability of success goes down considerably in such a case.
Time decay however works to your advantage when you employ option strategies such as vertical spreads or iron condor. Click here to read more about the pros and cons of options strategies and option buying.
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