How Does an Options contract’S’extrinsic Value’ Decay over Time?

Extrinsic value, also known as time value, is the portion of an option's premium that exceeds its intrinsic value. It represents the probability that the option will become profitable (in-the-money) before expiration.

This value decays over time, a phenomenon known as 'theta decay.' As the option approaches its expiration date, the probability of a favorable price move decreases, and the extrinsic value erodes at an accelerating rate. This decay is beneficial for option sellers and a cost for option buyers.