1. The essence of time value: paying for possibilities
Imagine you walked into a movie theater and spent 50 yuan to buy a ticket for "Detective Chinatown 3". Just after paying, you suddenly received a call to go back to the company to work overtime. At this time, you will face a choice: either refund the ticket immediately (minus 20% handling fee), or bet that you can get back within two hours. The time value of an option is like the cost of this gamble .
Tesla's quarterly options are often referred to as "melted ice cream" by veteran traders. For example, if you spend $10 to buy a call option that expires in one month, only $2 of it may be the real "meat" (intrinsic value), and the remaining $8 is all "cream" (time value).
As the expiration date approaches, this option is like ice cream under the scorching sun, and the time value is melting every hour. Last year, there was a joke on Wall Street: a novice bought Tesla's doomsday call option, but the stock price fell short of the exercise price by $0.5 before the closing. He watched the option go from $3,000 to waste paper, and was so angry that he smashed his keyboard.
Bitcoin options are more exciting. On Deribit, contracts that expire in 24 hours are called "time bombs." When Bitcoin was $30,000, a player spent 0.05 BTC to buy a doomsday option with an exercise price of 32,000. As a result, the Federal Reserve suddenly cut interest rates in the early morning, and Bitcoin rose to 32,500. The value of this contract instantly increased 60 times. But the price fell back three hours later, and the contract eventually returned to zero. The whole process was like riding a roller coaster and eating spicy hot pot, which was so exciting that it made people's stomachs ache.
2. The nonlinear magic of time decay
The passage of time value is not a uniform hourglass, but an iron ball falling at an accelerated rate. Take Tesla's cyclical option as an example:
When there are 7 days left until expiration, the time value evaporates by about 10% every day
Entering the last three days, the daily loss soared to 30%
On the day of doomsday, the value of the stock may drop by half from morning to afternoon.
This is like the discount rules of the seafood market: live fish are priced at 100 yuan in the morning, 20% off at noon, and 50% off in the evening. Professional market makers are "timekeepers". They know that the time value of US stock options on Thursday afternoon decays twice as fast as on Wednesday. Selling straddles at this time is like picking up bargains before the fish market closes.
Bitcoin options have taken this feature to the extreme. Previously, on the day when LUNA crashed, a miner bought a doomsday put with an exercise price of $100,000 4 hours before the crash, when Bitcoin was still hovering around $30,000. As a result, a black swan suddenly struck, and the price plummeted to $25,000. This seemingly absurd contract actually made 800 times the profit. But 99% of similar operations are like dancing in the crater of a volcano - you may catch a miracle once, but more often you will be swallowed by magma.
3. Time Offensive and Defensive Battle between Long and Short Camps
Buyers and sellers have very different perceptions of time.
There is an old trader in Chicago who has an electronic clock in his office that specifically displays the "option expiration countdown." Whenever he takes over the training of new employees, the first lesson he teaches is to take them to the supermarket to check the shelf life of yogurt: "See? Yogurt that expires in 7 days is 50% off on the 6th day. This is what happens when you buy out-of-the-money options."
Sell-side players have a different philosophy of survival. There is a jargon in JPMorgan Chase's options department called "collecting time tax" - they are like the old man who runs a parking lot, selling Tesla's doomsday puts, and steadily harvesting millions of dollars of time value every month. But when the U.S. stock market circuit breaker in March 2020, this group of "tax collectors" was overwhelmed by panic overnight, and one trader lost more than the total commission he earned in the past three years.
The Bitcoin market is even more brutal. A quantitative team once developed a "doomsday strategy": automatically scan all out-of-the-money options 2 hours before expiration, and short-sell contracts with sudden volatility increases. As a result, Musk suddenly called for Dogecoin, which led to a 15% surge in Bitcoin. This strategy lost 38 BTC in a single day. The team leader later mocked himself on Twitter: "We are like picking up coins on the highway, and occasionally we get hit by a truck."
4. Time management in practice
Real experts are well versed in "time zone arbitrage". Professional players specialize in the difference in volatility between after-hours US stocks and early Asian trading. For example, if Tesla's stock price jumps 5% after the release of its financial report, he will immediately buy Tesla call options on Hong Kong stocks that expire in 12 hours, because there is always a 10-minute lag in market makers' quote updates, and the time value during this period has not been fully priced.
Bitcoin players have invented "time zone guerrilla warfare". Since digital currency exchanges never sleep, some people will buy options in the early morning of London (during the day in Asia) when volatility is low, and then sell them when volatility rises after the US institutions go to work. Previously, a trader bought Ethereum weekly call options on Binance at night. 8 hours later, Coinbase launched a new token, which caused a surge. The contract made 17 times the profit when it was resold.
But the double-edged sword of time has also caused tragedy. A programmer wrote an automatic trading script, which was set to close all positions one hour before expiration. As a result, the exchange API failed one day, and the script failed to execute. Options worth $800,000 became nothing after expiration. He later carved this code on a wooden board as a decoration to remind himself "always leave a backdoor for manual intervention in the system."
5. Your Time Value Survival Guide
If you don’t want to be swallowed by time, remember three iron laws:
Buying options is like ordering takeout - place an order before an important event and leave when the meal is finished. For example, enter the market the day before Tesla's financial report and leave immediately after the announcement, regardless of profit or loss, before waiting for the time value to evaporate.
Selling options is like running a convenience store - choose a time with high traffic (high volatility) to purchase goods, and close the store to avoid risks when there are few customers (low volatility). Sell wide straddles when Bitcoin is sideways, and clear positions before encountering major policy events.
Doomsday trading should be like defusing a bomb - either wear explosion-proof clothing in advance (strictly stop loss), or simply stay away from the danger zone. There is a bitter lesson: a retail investor entered the Bitcoin option with a full position 10 minutes before the expiration of the option, but the price was stuck at the break-even point of 0.5%, and he ended up with nothing.
A trader who climbed out of the abyss of margin calls often said: "Time value is the toll collected by God. You can escape an order occasionally, but never dream of defaulting on your debt." He has tattooed this sentence on his left forearm and he would look down at it before placing every order.
6. Next Issue Preview
Tomorrow we will unlock "Order Types and Transaction Strategies"
After-class tasks :
Select a Tesla cycle option and record the time value decay at the close of each day
Find two Bitcoin options on Deribit with an expiration date of 7 days apart and compare their daily time value loss rates
Leave a message to share the most dramatic "time killing" case you have experienced or seen
