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Time decay curve

The non-linear shape of extrinsic value loss over an option's life: slow early, accelerating in the final weeks, near-vertical in the last days.

Extrinsic value decays roughly with the square root of time remaining, which means a 90-day option loses far less per day than a 30-day one. The curve is steepest at the money; out-of-the-money options decay more evenly and simply fade to zero.

This shape is the entire argument behind common management rules. Sellers open positions where decay is about to accelerate and close before the violent final stretch where gamma risk outweighs the remaining premium; buyers do the reverse.

Example: an XYZ $50 call with 90 days is worth $3.20, at 45 days $2.30, at 21 days $1.55, at 7 days $0.90, at 1 day $0.35. The second half of the life gives up more value than the first, and the last week alone gives up more than the first month.

Related: theta, management-at-21-dte, short-dated-options, extrinsic-value

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How an option's time value decaysA curve sliding gently downward at first and then dropping steeply into expiry, where it reaches zero.Extrinsic (time) value6420906030Value bleeds away slowly at firstDecay speeds up hereWorth nothing at expiryexpiryDays to expiry
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

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