Premium decay also known as time decay or theta decay is the gradual erosion of an option's extrinsic (time) value as the expiry date approaches. All else being equal, an option loses value every day simply because there is less time remaining for the underlying to make a favourable move. This decay is not linear it accelerates significantly in the final 30 days before expiry and is fastest in the last week. For options buyers, premium decay is a constant headwind that must be overcome by a sufficiently large move in the underlying. For options sellers, it is the primary source of profit — they collect premium upfront and benefit as time erodes the value of the options they have sold. Understanding premium decay is central to any options income strategy.
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