# theta decay

Implied time decay rate for prediction markets. Measures how the market price should move toward 0% or 100% as resolution approaches, all else being equal.

## Concept

Prediction markets must resolve to either 0% or 100%. As time passes, uncertainty decreases and prices accelerate toward their final value. This is analogous to theta decay in options pricing.

```
Theta = Rate of price convergence toward resolution
```

A market at 60% with 30 days left has lower theta than the same market at 60% with 3 days left. Near-resolution markets move faster.

## How It's Calculated

```
Implied Theta = f(current_price, days_to_resolution)
```

The function accounts for:

* **Distance from extremes**: Markets near 50% have higher theta potential (more room to move)
* **Time remaining**: Theta accelerates as resolution approaches
* **Market activity**: Active markets converge faster than stale ones

## Interpreting Theta

| Theta Level  | Meaning                                                                     |
| ------------ | --------------------------------------------------------------------------- |
| **High**     | Market is near resolution and/or far from 50%. Expect rapid price movement. |
| **Moderate** | Normal time decay. Price should drift gradually toward resolution.          |
| **Low**      | Long-dated market or price already near an extreme. Slow movement expected. |

## Practical Use

1. **Position timing**: High theta markets reward early entry. Waiting costs you as the price converges.
2. **Holding cost**: If you hold a position in a flat market, theta decay works against you if the market eventually moves the other way.
3. **Opportunity cost**: In high-theta markets, your capital is tied up for less time but with more urgency to be right.

## Relationship to Lifecycle

The [Enriched Signals](file:///6948179/methodology/enriched-signals.md) provide a lifecycle classification:

| Stage                   | Typical Theta                   |
| ----------------------- | ------------------------------- |
| **New** (<7 days old)   | Low (too early for convergence) |
| **Young** (7-30 days)   | Low to moderate                 |
| **Mature** (30-90 days) | Moderate                        |
| **Veteran** (>90 days)  | Depends on resolution date      |

Markets with urgency = CRITICAL (resolving within days) have the highest theta regardless of age.


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