Time Decay

What is Time Decay?

Time Decay Time decay, measured by the Greek theta, is the systematic erosion of an option's extrinsic (time) value as expiration approaches. Every day that passes, an option's extrinsic value decreases — even if the stock price, implied volatility, and interest rates remain unchanged. Time decay is the central mechanic that makes options strategies fundamentally asymmetric. Time decay is non-linear. It follows roughly a 1/sqrt(time) curve, meaning decay accelerates dramatically as expiration approaches: - **60+ DTE**: minimal decay, ~1% of extrinsic per day. - **30 DTE**: moderate decay, ~3% per day. - **21 DTE**: noticeable decay, ~4-5% per day. - **14 DTE**: steep decay zone begins, ~7% per day. - **7 DTE**: dominant decay, ~10-15% per day. - **0DTE intraday**: extreme decay, 30-100% of remaining premium per session. This accelerating curve is the reason premium-selling strategies typically focus on 30-45 DTE entries with 21 DTE exits. The window captures meaningful theta accrual while avoiding the explosive gamma risk that comes inside 14 DTE. Holding to expiration sounds like "maximum theta extraction" but actually trades steady decay for explosive gamma risk that often converts winners into losers. Time decay has opposite effects depending on position: - **Long options**: theta is negative — extrinsic value bleeds out daily. You lose money each day even if the stock doesn't move adversely. - **Short options**: theta is positive — premium collected accrues to your account daily as the option loses value. - **Long stock**: theta is zero — stock has no time component. - **Spread positions**: net theta depends on structure. Credit spreads are net positive theta; debit spreads are net negative. The theta clock is why options buying is structurally difficult. To profit from a long option, the directional move (or IV expansion) must materialize quickly enough to overcome the cumulative time decay. Many otherwise-correct directional bets lose money because the move took too long. For premium sellers, time decay is the engine of profit. Iron condors, credit spreads, covered calls, and cash-secured puts all generate income from theta as time passes. The economics: collect more theta than gamma risk costs. Time decay differs across the strike chain. ATM options have the highest absolute theta because they carry the most extrinsic value. Deep ITM and deep OTM options have lower theta — ITM is mostly intrinsic (which doesn't decay), and OTM has less time value to lose.