Lessons › Why traders lose › Cheap options near expiry
World 11 · Why traders lose · lesson 23 · level 2
Cheap options near expiry
A cheap option near expiry is cheap because almost no time is left, so it needs a big move fast, and on a normal day it ends at zero.
In one line
An option for 20 cents looks like small money with a big upside. Near expiry, it is cheap for a reason, and the reason is a clock.
Explained simply
A call option is a ticket: the right to buy at a set price, the strike, until a set day, the expiry. On that day it pays the price minus the strike, or zero. Part of its price is time, the chance of a big move before the last day, and that part shrinks to zero. Example: price is $100, the strike $105, one day is left, and it costs 20 cents. Price must rise more than 5% to pay anything. Even a normal Bitcoin day spans 3.9%, so on a normal day it ends at zero.
A worked example
An example: price $100, strike $105, one day left, cost $0.20. On the last day it pays price minus strike, or $0. To pay anything, price must end above $105, a rise of more than 5%. To get the 20 cents back, it must reach $105.20, a 5.2% rise, while even a normal Bitcoin day spans 3.9%, top to bottom.
Mistakes to avoid
- Thinking an option is a bargain because it costs only cents.
- Forgetting that the time part of the price shrinks to zero on the last day.
- Calling an option cheap without working out the move it needs.
Check yourself
What does a call option pay on its expiry day?
Price minus the strike, or zero. It is the right to buy at the strike. On the last day it pays price minus strike if that is above zero, and nothing otherwise.
What happens to the time part of an option's price as expiry gets closer?
It shrinks, to zero on the last day. Time is the chance of a big move before the last day. Each day less is left, and on the last day it is worth zero.
Price is $100 and the strike is $110, with one day left. How much must price rise for the option to pay anything?
More than 10%. It pays only above the strike, and $100 to $110 is a 10% rise in one day. Even a normal Bitcoin day spans only 3.9%, top to bottom.
What did India's market regulator find for the year to March 2026?
59% of index option trading was on expiry day. 59% of index option trading was on expiry day itself, and options caused 92% of individual traders' losses.
The example option needs a 5.2% rise in one day to get its 20 cents back. Why does it end at $0 on a normal day?
A normal day spans only 3.9%, top to bottom. A day whose whole range is 3.9% cannot hold a rise of more than 5%, so on a normal day the ticket pays nothing. Always work out the move it needs.
Goal of this lesson: Work out how far price must move before a cheap option pays anything, and compare it with a normal day's move.