Every option has an expiry date. As that date gets closer, the option loses value, even if the stock price doesn't move at all. This loss in value, just from time passing, is called time decay. In options trading, we use the Greek letter Theta (Θ) to measure it.
Think of an option like an ice cube. Even sitting still, doing nothing, it slowly melts. The stock price is the room temperature. It affects how fast the ice melts, but the ice melts either way, just from time passing.
Why this matters
If you buy options, time decay works against you. Every day that passes, your option is worth a little less, all else being equal. You need the stock to move in your favour, and move enough, before time eats away your position.
If you sell options, time decay works for you. You collect a premium upfront, and every day that passes without the stock moving against you, that premium is a little more "locked in." This is why many traders who sell options describe themselves as being "paid to wait."
Decay isn't a straight line
Time decay isn't steady. It speeds up as expiry gets closer. An option with 60 days left decays slowly. The same option with 5 days left can lose value very quickly, day by day. This is one reason short-dated options (like the 1-3 day options we often write about here) behave so differently from options with months left on them.
What this doesn't mean
- It doesn't mean selling options is "free money." You're taking on real risk if the stock moves against you, sometimes a large risk.
- It doesn't mean buying options is always a bad idea. If you expect a big, fast move, paying for that speed can be worth it.
- It's one factor among several (the other Greeks matter too), not the whole picture on its own.