Time Decay (Theta)

Definition

Every option’s price contains two components: intrinsic value (how much it would be worth if exercised right now) and time value (the premium above intrinsic value that buyers pay for the chance of further favorable movement). Time decay, measured by the Greek letter theta, is the daily erosion of that time value. At expiration, time value reaches exactly zero — only intrinsic value remains.

Theta is reported as a dollar amount per day per contract. A theta of −0.05 means the option loses about $5 of value per day (since contracts cover 100 shares) all else equal. For the buyer, theta is a constant headwind: every sunrise the position is worth slightly less even if nothing else moves. For the seller, theta is a tailwind — they collected the premium upfront, and every passing day moves the option closer to expiring worthless and locking in the gain.

Decay is not linear. Time value erodes slowly at first, then accelerates sharply in the final 30 days, with the steepest collapse in the last week. A 60-day option might lose 30% of its time value in the first 30 days but the remaining 70% in the second 30 days. This convex curve is why theta is such a powerful force at the short end of the expiration spectrum.

Why it matters

Key takeaways

Every option is a wasting asset. Time value erodes monotonically to zero by expiration — only intrinsic value survives the final bell.
Theta accelerates as expiration nears. The last 30 days carry roughly half of an option's total time decay; the last week is the steepest stretch.
Buyers fight theta every day; sellers harvest it every day. The 'edge' of premium-selling strategies is largely a theta capture.
At-the-money options carry the most time value — and therefore the most absolute theta to lose. Deep ITM and deep OTM options have little time value left to decay.
LEAPS (1+ year expirations) decay slowly. Weekly options decay rapidly. Choose duration to match whether you are buying time or selling it.
Theta is unaffected by whether the stock is moving — it ticks down 7 days a week, regardless of weekends or holidays (the market just collapses the weekend decay into Friday's close).

The shape of the decay curve

Read it as: Decay is convex, not linear. Holding a long option through the last 30 days is the single most expensive habit in options trading — the same premium that took 60 calm days to bleed off can evaporate in 30 hot ones. Sellers position into this curve; buyers should exit before it.