Theta (Time Decay)

Theta is the rate at which an option's value declines as time passes with everything else unchanged, usually quoted per day. Option buyers pay theta; option sellers collect it. In 0DTE contracts theta is at its extreme - the entire remaining time value decays within a single session.

An option's price has two parts: intrinsic value (what it would be worth exercised now) and time value (the premium for what might still happen). Theta measures how quickly that time value erodes. A theta of −2.50 means the option loses about $2.50 of value per day, all else equal.

Decay is not linear. It accelerates as expiration approaches and is largest for at-the-money strikes, where uncertainty about finishing in or out of the money is greatest. A 0DTE option is the limiting case: its whole remaining time value must decay to zero by the close, which is why same-day contracts are so cheap in dollar terms and so violent in percentage terms.

Structurally, theta is one reason short-premium behavior clusters into expiration and why pinning intensifies late in the day - the time-driven Greeks (theta and its delta counterpart, charm) force hedging adjustments on a schedule set by the clock rather than by news.