Time Decay

Time decay, measured by the Greek theta, is the erosion of an option's extrinsic (time) value as expiration nears. Options are wasting assets — they have a finite lifespan, and each passing day reduces the time available for the underlying to move favorably. Time decay is not linear; it accelerates exponentially in the final weeks before expiration, with roughly one-third of time value lost in the last week alone for at-the-money options. Out-of-the-money options are composed entirely of time value and will expire worthless if the underlying doesn't move sufficiently. In-the-money options retain their intrinsic value but lose their time premium. Time decay is the enemy of option buyers and the ally of option sellers, which is why strategies like covered calls, iron condors, and credit spreads are designed to profit from this phenomenon. Weekends and holidays also contribute to time decay, though the exact treatment varies by market convention.