Why time costs money to the buyer

At maturity, an option is worth its intrinsic value— and only that. Either it's ITM and you exercise (pocket the difference) or it's OTM and it dies worthless. No more uncertainty, no more chance of a move.

Before maturity, the option is worth more than its intrinsic value. The difference is time value — the price of the chance that the option will become more valuable before expiry. That time value bleeds away every day. The bleed rate is called theta.

How fast does it decay?

Time decay is not linear. It accelerates as expiry approaches:

• A 1Y ATM call might lose ~1% of its value per week early on.
• The same option at 1 month to expiry loses ~5%/week.
• At 1 week to expiry: it can lose 30–50% of remaining value per day.

Why? Less time = less chance the spot will move enough to matter. The remaining time value collapses into intrinsic value (which doesn't decay) at the last moment.

Theta peaks where gamma peaks

ATM options near expiry have the highest theta — and the highest gamma. The two trade off against each other: long gamma (good when spot moves) but short theta (rent ticking out every day). Vol traders live and die by this trade-off.

Deep ITM or deep OTM options have very little theta because they have very little time value to begin with — there's nothing left to bleed.

Why this matters for trading

• Short-dated options: high theta. Sellers love them as long as nothing big happens.
• Long-dated options: low theta. Buyers prefer them when they want optionality without bleeding.
• Calendar spreads (long the longer-dated option, short the shorter-dated one) explicitly exploit the theta gradient — collect theta on the short leg while keeping long-dated optionality.

Time decay is also why options "feel different" from stocks: spot can stay flat and you still lose money. The clock is always working against the buyer.