What Is the Concept of ‘Time Decay’ (Theta) in Option Pricing?

Time decay, or Theta, is the measure of an option's sensitivity to the passage of time. As the expiration date approaches, the extrinsic (time) value of an option erodes, meaning the option's price decreases, all else being equal.

This is because there is less time for the underlying asset's price to move favorably. Time decay is generally negative for long option positions and positive for short option positions.