Theta decay, or time decay, is the slow leak built into every option: as days pass, its price melts even if the stock does not move at all. Theta is the rate of that melt, quoted in dollars per day.
Here is why the leak exists. An option's premium is intrinsic value plus time value, and time value is the price of everything that could still happen before expiry. Every day that passes, less can happen, so that part of the price gets repriced down. The melt is not a straight line either: it is slow far from expiry and accelerates viciously in the final weeks. An option is the only thing in your portfolio that loses money by sitting still.
The numbers
A stock sits at $100 and refuses to move. You own the $105 call with 30 days left, bought for $3.00, which is $300 for the contract. All of it is time value. Watch what the calendar alone does to it.
| Days to expiry | Stock price | Option worth | Lost to the clock |
|---|---|---|---|
| 30 | $100 | $3.00 ($300) | 0 |
| 15 | $100 | ~$1.63 ($163) | -$137 |
| 7 | $100 | ~$0.71 ($71) | -$229 |
| 0 | $100 | $0 | -$300 |
The stock did nothing wrong. It just did nothing, and doing nothing has a price when what you own is hope with a deadline. Notice the pace: around $8 a day at the start, close to $13 a day going into the final week. Only in the last day or two does the melt fade, and not out of mercy: by then there is almost nothing left to take.
Where it bites
"I'll wait, it will come back." With shares, waiting is roughly free. With options, the clock charges rent every day. A stock that recovers in month two does nothing for the call that died in month one. Being right too late is the same as being wrong.
Weekends bill you too. The market is closed on Saturday; the calendar is not. Buy a short-dated option on Friday afternoon and part of its value quietly leaves before Monday's open.
Collecting theta feels like free income. Sellers earn the melt, which looks great until you notice what they are paid for: carrying the risk of the move. Picking up daily pennies in front of that steamroller is a strategy with its own lesson, and its own body count.
Go feel it
A table shows you the melt. Watching your own $300 evaporate while a simulated stock goes sideways is a different experience entirely. Sit with the clock in Lesson 4: The Clock, and see the seller's side of the melt in The Premium Trap.
Related concepts: option premium · strike price · ITM, OTM, ATM