What Is Time Decay?

Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an option’s time to expiration draws closer since there’s less time to realize a profit from the trade.

KEY TAKEAWAYS

  • Time decay is the rate of change in value to an option’s price as it nears expiration.
  • Depending on whether an option is in-the-money (ITM), time decay accelerates in the last month before expiration.
  • The more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases.

How Time Decay Works

Time decay is the reduction in the value of an option as the time to the expiration date approaches. An option’s time value is how much time plays into the value—or the premium—for the option. The time value declines or time decay accelerates as the expiration date gets closer because there’s less time for an investor to earn a profit from the option.