Theta

Theta measures the rate at which an option loses value due to the passage of time, expressed as the dollar amount the option's price declines per day. A theta of -0.05 means the option loses $0.05 per share ($5 per contract) each day, all else being equal. Theta is always negative for long options and positive for short options.

Why It Matters

Time decay is one of the most predictable forces in options trading. Unlike stock price and volatility, time moves in one direction — forward. Every day that passes erodes extrinsic value, and this decay accelerates as expiration approaches. Theta is the reason option sellers have a structural edge: they collect premium that shrinks over time, even if the stock goes nowhere.

For buyers, theta is the cost of holding a position. If you buy an option and the stock doesn't move, you lose money every day. Understanding theta helps you set realistic timeframes and avoid paying for more time than you need.

How It Works

Theta is not linear — it accelerates. An option loses time value slowly in the early weeks and rapidly in the final days.

Approximate theta decay curve:

• 60 to 30 days out: Moderate, steady decay
• 30 to 14 days out: Noticeable acceleration
• 14 to 7 days out: Sharp acceleration
• Final week: Dramatic, rapid decay

Where theta is highest:

• ATM options have the highest theta because they carry the most extrinsic value
• Deep ITM and deep OTM options have lower theta because they have less extrinsic value to lose
• Short-dated ATM options have the highest theta of all — they are decaying the fastest

Theta for sellers vs. buyers:

• If you sell a call or put, theta works for you — you keep the premium as it decays
• If you buy a call or put, theta works against you — your option loses value daily
• Spreads have net theta: a credit spread has positive theta (benefits from decay), a debit spread has negative theta (pays for decay)

Weekend and holiday theta: Options technically decay over calendar days, not just trading days. However, markets often price in weekend decay during Friday's session, so you may not see a visible drop on Monday morning.

Quick Example

You sell an ATM put on stock STU ($60 strike, stock at $60) with 30 days to expiration. The premium is $3.00 and theta is -0.08. This means the option loses roughly $0.08 per share per day. After 10 days (stock unchanged), the option might be worth around $2.20 — you have gained $0.80 per share ($80 per contract) from time decay alone.

If you had bought that same option, you would have lost $80 to theta in those 10 days, even with no stock movement.