Define “Theta Decay” and How It Impacts OTM Options as Expiration Approaches

Theta decay is the rate at which an option's time value erodes as it approaches expiration, all else being equal. It is represented by the option Greek "Theta," which is typically a negative number.

For OTM options, which consist entirely of time value, theta decay is a constant and accelerating loss. The closer the OTM option gets to expiration, the faster its premium shrinks toward zero.