Illustrative article · Sample editorial content and publication date, prepared for this website. Not a disclosure of proprietary research.
Decay is not linear
An option loses time value slowly at first and quickly near expiry, especially at strikes close to the current index level. A position held into the final days is exposed to that acceleration, in both directions.
The smile changes the odds
Implied volatility is usually higher for strikes well below the index than for strikes near it. This shape, often called the smile or skew, means the market prices large falls as more likely than a simple model would. Strike selection that ignores it misjudges both premium and risk.
Choosing a strike is choosing a distribution
Each strike is a different trade-off between how often an option finishes worthless and how much it pays when it does not. Judging strikes by their full distribution of outcomes, across many expiries, gives a steadier basis than judging them by premium alone.