How Does the Passage of Time, or ‘Theta’, Impact the Time Value of an American Option?

Theta is the measure of an option's sensitivity to the passage of time, often referred to as time decay. As time passes, the time value of an American option erodes, meaning its premium decreases, all else being equal.

This decay accelerates as the option approaches expiration, especially for at-the-money options. The option holder loses value daily due to theta.