What is time decay?
In one line: Time decay is the steady loss in an option's price as expiry approaches, measured per day by theta, and it speeds up in the last few weeks.
How it works
Every option has a part of its price that pays for time. More days until expiry means more chances for the stock to move, so the option is worth more. As days pass, that part melts away. That melt is time decay.
Theta is the number that measures it. A theta of −0.05 means the option is expected to lose about $0.05 per share each day, or $5 per contract, if nothing else changes.
Decay isn't a straight line. It's slow when expiry is far off and fast at the end. Picture a hill that gets steeper near the bottom. An option with 60 days left loses a little each day. The same option with 7 days left loses a lot each day.
For sellers, time decay is the edge. You sold the option, so its price dropping is your gain. It's why the wheel strategy works best when the stock does nothing.
An example (hypothetical)
An illustration, not a trade idea. Made-up stock XYZ trades at $50 and stays there. You sell a 30-day Call option at the $55 Strike price for $1.00, with 100 shares behind it.
| Days left | Option price (about) | Decay so far | Your position on the call |
|---|---|---|---|
| 30 | $1.00 | $0 | $0 |
| 20 | $0.75 | $0.25 | +$25 |
| 10 | $0.45 | $0.55 | +$55 |
| 0 | $0.00 | $1.00 | +$100 |
| 0, but XYZ fell to $44 | $0.00 | $1.00 | +$100 on the call, −$600 on the shares = −$500 |
Now the same trade, but XYZ falls to $44 by expiry. The call still decays to zero, so you keep the $100. Your 100 shares lose $600. Net: −$500. Time decay did its job. The stock didn't care.
Why it matters for sellers
Time decay is the reason to sell options at all. But three things trip people up:
- Decay is small per day. On a $1.00 option with 30 days left, early days might melt $0.02. The stock can move $1.00 in an hour.
- The fast part is also the risky part. The last week has the fastest decay and the fastest swings in the option's value when the stock moves (that's Gamma risk). Many sellers close early rather than ride it.
- Decay doesn't protect shares or cash. It only shrinks the option. On a covered call or cash-secured put, the stock is still the main risk.
A good habit: note the theta on the day you sell. Then check how much the stock moved that same day. That tells you, in dollars, what you're really betting on.
Questions
Does time decay happen on weekends?
The model counts calendar days, so yes, in theory. In practice market makers often price some of the weekend's decay into Friday's close, so Monday's drop is smaller than three days' worth.
When is time decay fastest?
In the last two to three weeks before expiry, and fastest of all in the final days for options near the stock price. Options far from the price have little time value left to lose by then.
Is time decay good or bad for me?
Good if you sold the option, bad if you bought it. On a short put or covered call, decay works for you every day. The stock's move can still outweigh it.
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