Skip to content
GetProfitable
Search
Dictionary

Theta

The amount an option loses per day from the passage of time alone, all else equal.

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.

Theta is the daily cost of owning an option and the daily income of selling one. It is largest for at-the-money options and accelerates as expiration nears. Weekends count: an option loses three days of theta from Friday close to Monday open.

Sellers of credit-spreads, iron-condors, and covered-calls are harvesting theta. Buyers must overcome it with movement or implied-volatility gains.

Example: an option priced at $3.00 with a theta of -0.05 will be worth about $2.95 tomorrow if the stock and volatility do not change.

Related: extrinsic-value, delta, gamma, credit-spread, expiration-date

Educational only, not advice. Spotted an error? Post in Site Feedback.