Time Decay, also known as "theta," is a measure of the rate at which the value of an option decreases as the expiration date approaches. This is because options contracts are wasting assets, meaning that they lose value over time as the probability of the option being exercised decreases.Options contracts have an expiration date, which means that the holder of the option has the right, but not the obligation, to buy or sell the underlying asset at a specific price (strike price) on or before the expiration date. As the expiration date approaches, the probability of the option being exercised decreases, which means that the value of the option also decreases.The impact of time decay on options contracts can vary depending on the type of option and the strike price.For example, in-the-money options (options where the strike price is below the current market price for a call option or above the current market price for a put option) have a greater intrinsic value, which means that they are less affected by time decay. On the other hand, out-of-the-money options (options where the strike price is above the current market price for a call option or below the current market price for a put option) have a lower intrinsic value and are more affected by time decay.For example, let's say an investor buys a call option on a stock with a strike price of $50, expiration date in 3 months and the current stock price is $55. As the expiration date approaches, the stock price remains unchanged and the time decay will be eating into the option's value. In this scenario, the option holder would lose money as the expiration date gets closer.In summary, Time decay is a natural process that affects all options contracts, it's the rate at which the value of an option decreases as the expiration date approaches. The impact of time decay depends on the type of option, strike price and the underlying asset's price. Investors should keep in mind that time decay can have a significant impact on the profitability of options trading strategies and should be considered when making investment decisions.
