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Theta

In short

Time decay — how much value an option loses each day as expiration approaches

Options are like ice cubes that melt over time. Theta measures how fast value evaporates daily. An option with theta of -$0.05 loses $5 per day per contract, all else equal. Time is your enemy as an option buyer.

Theta is negative for option buyers (value decays over time) and positive for option sellers. Time decay accelerates as expiration approaches, especially in the final 30 days. Theta is the primary reason most options expire worthless.

Formula

Theta = ∂Option Price ÷ ∂Time (typically expressed as $ per day)

Related concepts

  • Delta — If a call has delta of 0.5, it gains $0.50 for every $1 the stock rises. Delta 1.0 means the option moves dollar-for-dollar with the stock. At-the-money options typically have delta near 0.5.
  • Gamma — Gamma measures how fast delta changes. High gamma means your option becomes more or less sensitive quickly as the stock moves. Near expiration, gamma is highest — small stock moves cause big swings in option value.
  • Implied Volatility — Implied volatility is the market's guess about how much a stock will move. High IV means expensive options (the market expects big moves). Low IV means cheap options. Buy options when IV is low, sell when IV is high.
  • Expiration Date — Options have a use-by date. After expiration, they're worthless unless exercised. Shorter expirations are cheaper but give you less time to be right. Longer expirations (LEAPS) cost more but give the trade more time to work.