What is Theta Decay?

Theta decay is the value an option loses each day just because time passes. A bet with a deadline is worth less with each day that goes by. Buyers pay this cost daily; sellers collect it.

An option's price has two parts: real value it would have if used today, and time value, the extra you pay for the chance that the stock still moves your way before expiration. Theta measures the daily shrink of that second part: a theta of -0.05 means the contract loses about $5 a day even if the stock never moves, because each passing day removes chances for the move to happen. That is why an option gets cheaper at the same stock price: what you bought was possibility, and there is less of it left every morning. The melt is not a straight line, gentle months out, faster in the final 30 days, steepest in the last week, when almost no chances remain. The melting applies only to that time-value part. Take a $50 call with the stock at $56: about $6 of its price is solid, because the option already lets you buy $56 shares for $50, and only the extra above $6 drains away as days pass. Sit the stock at $56 for two weeks and the option's price slides toward $6: nothing about the stock changed, but two weeks of remaining chances are gone, and that slide is exactly the income an option seller collects.

Concert tickets as the show date approaches. A ticket for a show three months out holds its price, one for next week gets harder to sell each day, and at showtime an unused ticket is worth exactly nothing. The seat never changed; the time to use it ran out, and the value was the time.