Theta
How much value an option loses per day purely from the passage of time.
Also called: time decay · option theta
In plain language
Theta is quoted as a negative number for option buyers. A theta of −0.05 means the option loses about $0.05 of value per day, all else equal.
Decay accelerates as expiration approaches, and it is concentrated in extrinsic value. At-the-money options in their final weeks decay fastest.
Option sellers collect theta. It is the compensation for taking on obligation and undefined risk.
Why it matters
Theta is the cost of being early, charged daily. It is why an options trade needs a thesis about timing, not just direction.
Common mistakes
- Buying options for a slow-developing thesis and paying decay the whole way.
- Ignoring that weekends still cost theta.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The part of an option’s premium beyond intrinsic value, reflecting time and volatility.
The date an options contract ceases to exist.
The rate at which delta changes as the underlying moves.
The price paid for an options contract.
How much an option’s price moves for a $1 move in the underlying.