Time decay

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Time decay

Related: Theta

Time Decay

The decline in value of an option contract as it approaches the expiration date. In an out-of-the-money option, the closer the contract is to expiry, the less likely it is that the option will become in-the-money, reducing its value. Time decay is also called time-value decay.
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Because the mathematics that define option pricing cause time value to erode more quickly as an option nears its expiration date - a phenomenon known as time value decay.
The underlying theory for time value decay can be easily understood in terms of insurance policies.