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Theta decay explained: why options melt as expiry gets close

An option is a bit like an ice cube. Even if nothing happens, it melts. Here's how fast, and why the melting speeds up near the end.

Beginner guide · 8-minute read · Updated 2026-10-21

The ice cube idea

Part of every option's price is time value: what people pay for the chance of a bigger move before expiry. Our guide on how options are priced explains the split.

Time value has to reach zero at expiry. So as each day passes, a bit of it disappears. That loss is time decay. Theta is the Greek that measures it, in dollars per day.

A theta of −0.05 means the option loses about $0.05 a day, or $5 per contract, if nothing else changes.

The surprise: it doesn't melt evenly

You might expect an option to lose the same amount each day. It doesn't.

In the standard pricing model, an at-the-money option's time value shrinks roughly with the square root of the days left. The practical result: slow at first, fast at the end.

The decay table

A made-up stock trades at $100. Here's an at-the-money $100 call, priced with a steady 30% Implied volatility. The stock never moves. Only time passes. (Illustrative model prices.)

Look at the last column. The daily melt is about 12 times faster on the final day than it was 2 months out.

What it means for a buyer

If you buy that 30-day call for $3.44 ($344 per contract) and the stock sits still:

Check other numbers with the options profit calculator.

Some ways buyers deal with decay:

• Buy more time than you think you need. A 60-day option melts more slowly per day than a 7-day one.
• Set a time stop. "If the move hasn't started in X days, I'm out," decided before entry.
• Know the theta in dollars. Multiply theta by 100 and by the contracts held. That's the daily cost of waiting.

What it means for a seller

The seller of that option collects the premium up front. Every day the stock sits still, decay works in the seller's favor.

That sounds like a gift. It isn't free. The seller takes on the risk of a big move. A sold call has no ceiling on its loss if the stock keeps rising, unless it's covered by shares or a bought call. That's why strategies like the covered call and vertical spreads exist: they cap or cover that risk.

Weekends and holidays

Markets close on weekends, but the calendar keeps going. Models differ on how to count those days. In practice, option prices often drift lower into Friday's close as traders price in the weekend.

The exact amount isn't fixed. Just don't expect a Monday price to be the same as Friday's if the stock is flat.

Decay is fastest near the money

The table shows an at-the-money option. Options far in or far out of the money have less time value to lose, so their daily theta is smaller in dollars.

But a cheap, far out-of-the-money option can still lose a big share of its price each day near expiry. A $0.20 option going to $0.10 is a 50% loss.

Decay on the final day

On the day an option expires, theta is at its most extreme. Our guide to 0DTE options covers what that means: options that can lose most of their value in hours.

Common mistakes

• Holding a bought option "to see what happens" into the last week. That's when decay is steepest.
• Thinking theta is the only force. A jump in Implied volatility can outweigh a day of decay. A drop can add to it.
• Selling options for the decay without a max loss. Write down the worst case in dollars first.
• Comparing theta across expiries as if equal. A short-dated option's theta is bigger and rises faster.

Try it today (no money needed)

1. Pick an at-the-money call on a large stock, about 30 days out.
2. Write down its price and theta each day for one week, at the same time of day.
3. Also note the stock's price each day.
4. On days the stock barely moved, did the option drop by about the theta?
5. Repeat the next month with a 7-day option. Compare the daily losses.

Questions