How Does the Concept of ‘Time Decay’ Impact OTM Options versus ITM Options?

Time decay, measured by Theta, negatively impacts all options, but its effect is often more pronounced on OTM options. Since OTM options only consist of extrinsic value, the decay directly erodes their entire worth.

ITM options retain their intrinsic value, which is not subject to Theta decay, making them less susceptible to total value loss from time passing, though their extrinsic component still decays.