Theta
How much value an option loses per day purely from the passage of time.
Also called: time decay · option theta
Written by Javier Sánchez Ros
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.
Worked through
Theta of −0.09 across a flat week
- Theta per day
- −$9 per contract
- Contracts held
- 4
- Cost per day
- −$36
- Seven days, stock unchanged
- −$252
The stock did nothing all week and the position lost $252. No mistake was made and no order was filled; the calendar simply advanced, and the part of the premium that was paying for future possibility had a week less to justify itself.
This is the clearest way in which options differ from shares. A stock position that goes sideways costs nothing to hold. An option position that goes sideways has a running meter, and the meter charges on weekends too.
The rate is not constant. Theta accelerates as expiry approaches and is largest for at-the-money options with little time left — which are exactly the contracts that look cheapest to a trader shopping by price.
The practical consequence is that direction alone is not a thesis. The trade needs the move to happen within a window, and buying more time is the straightforward way to widen that window, at the cost of more premium up front.
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.