Theta decay (or time decay) is the daily erosion of an option's price as it approaches expiration. Every day that passes, an option loses a little bit of value — even if the stock doesn't move at all.
An option's price has two components: intrinsic value (how much it's "in the money") and extrinsic value (time value + volatility premium). Theta eats away at the extrinsic value.
Think of it like an ice cube on a warm day. The closer it gets to expiration, the faster it melts. A 30-day option loses value slowly at first, then accelerates sharply in the final 7-10 days.
Theta is expressed as a daily dollar amount. If an option has a theta of -0.05, it loses approximately $5 per contract per day (0.05 × 100 shares). This assumes nothing else changes — stock price, volatility, etc.
This is why strategies like Cash-Secured Puts and Bull Put Spreads are called "theta strategies" — they're designed to collect time decay as income.
Theta isn't linear. A 60-day option might lose $2/day, while a 10-day option loses $8/day. This is why short-term options (7-21 days to expiration) are popular with premium sellers — the decay is fastest.
ThetaLoop's Theta Compass is named after this concept — it measures whether market conditions are favorable for harvesting time decay.