What Is Time Decay?
Time decay (theta) is the rate at which an options premium decreases as the contract approaches expiration. Every day that passes, the option loses time value because there is less opportunity for a favorable price move. An option worth $500 with 30 days to expiry might lose $15 per day in time value, accelerating to $30-50 per day in the final week.
How Time Decay Works
Theta decay is non-linear: it accelerates as expiration approaches, with roughly 60% of time value lost in the final third of the options life. At-the-money options experience the most theta decay because their premium is mostly time value. Deep in-the-money options (mostly intrinsic value) and far out-of-the-money options (small premium) have less absolute theta decay.
Why It Matters for Traders
Time decay makes options buying a race against the clock. Even if your directional thesis is correct, the underlying must move fast enough and far enough to overcome theta erosion. This is why options sellers (who collect premium) have a structural advantage: they profit from the passage of time. For buyers, minimizing theta drag means: choosing options with sufficient time to expiry (at least 2-3x your expected holding period) and targeting moves that will occur quickly.