Decay

Decay describes the way an option's price tends to shrink simply because time is passing, even if the price of the underlying stock or index doesn't move at all. An option is a contract that gives someone the right to buy or sell a stock at a set price before a certain date, and part of what that right is worth comes from the chance that the stock could move favorably before expiration. The more time left on the contract, the more chances for a useful move, so more time generally means more value. As days tick by and that window shrinks, some of the option's value fades away.

This fading happens even in a completely flat, unchanged market. Think of it like a melting ice cube sitting on a counter: it loses volume steadily just from sitting there, regardless of the room's temperature. Traders measure the speed of this melt with a number called theta, one of a family of risk measurements known as "the Greeks." Theta estimates roughly how much value an option loses per day from time passing alone, holding everything else constant.

The nuance that trips people up is that decay is not a straight, even line. It usually accelerates as expiration approaches, especially in the final few weeks, and it behaves differently depending on whether the option's strike price is near, above, or below the current stock price. An option that is far from being profitable if exercised (out-of-the-money) can decay toward worthlessness quickly near expiration, while an option deep in-the-money, meaning it would already be profitable to exercise, has less of its value tied to time and more tied to the stock price itself, so decay affects it less.

It's also worth separating decay from the option's other price drivers. A stock's price move can offset or overwhelm decay entirely, so an option can gain value on a big favorable move even while decay is quietly working against it in the background. Decay is a constant, predictable drag; the stock's movement is not.