Time Decay Mechanisms

Time decay, often called theta, is the rate at which an option's value decreases as it approaches its expiration date. Because options are wasting assets, their value is partially based on the amount of time remaining for the underlying asset to reach the strike price.

As time passes, the probability of the option ending in the money decreases, and its extrinsic value drops. For option sellers, time decay is a primary source of profit.

Understanding how this mechanism works is essential for managing a theta-positive portfolio, which is a common strategy in both crypto and traditional options trading.