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The daily erosion of an option's time value as expiration approaches.
Why It Matters
Time decay is the option buyer's enemy and the seller's friend. An option might lose $10/day in the final week before expiration. This is why buying short-term options is so risky - you need the stock to move fast just to break even. Sellers collect this decay as profit.
Key Points
- Time decay accelerates exponentially - most occurs in the final 30 days
- Weekends and holidays still count against time, so options lose value over non-trading days
- Theta decay is why 'buying weeklies' is often called burning money
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How Options Are Priced
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Common Questions
The daily erosion of an option's time value as expiration approaches. Time decay is the option buyer's enemy and the seller's friend. An option might lose $10/day in the final week before expiration.
Time decay is the option buyer's enemy and the seller's friend. An option might lose $10/day in the final week before expiration. This is why buying short-term options is so risky - you need the stock to move fast just to break even. Sellers collect this decay as profit.
Time decay accelerates exponentially - most occurs in the final 30 days
Weekends and holidays still count against time, so options lose value over non-trading days
Theta decay is why 'buying weeklies' is often called burning money