Why Does Theta Decay Accelerate as an Option Approaches Its Expiration Date?

Theta decay accelerates as an option approaches its expiration date because the extrinsic value, which is the time value component of the premium, is diminishing at an increasing rate. The probability of a significant price move that could turn an OTM option profitable decreases sharply in the final days or weeks.

Consequently, the time value premium drops quickly, causing the rate of decay (Theta) to become more negative, which means the option loses value faster.