How Does the Concept of “Time Decay” or Theta Affect the Pricing of an Out-of-the-Money Call Option?

Theta is the measure of an option's sensitivity to the passage of time, often called time decay. For an out-of-the-money call option, Theta is a negative value, meaning the option's value decreases as the expiration date approaches.

This happens because the probability of the underlying asset price moving above the strike price before expiration diminishes over time. The decay accelerates as the option gets closer to its expiration date.

Time decay is a key factor for options sellers, who benefit from the value erosion.