Table of Contents

Theta: What It Means in Options Trading, With Examples

By

James Chen

Updated May 10, 2025

Reviewed by

Gordon Scott

Fact checked by

Yarilet Perez

Definition

Theta, the Greek letter θ, is an options risk factor that measures the speed of decline in the value of an option as it approaches its expiration date.

What Is Theta?

An option tends to lose value at a faster rate as it gets closer to maturity or the contract's end. The Greek letter θ or "theta" measures this loss in value. Theta is also known as an option's time decay. It's the daily amount by which an option's value drops.

Key Takeaways

An option will lose value as it approaches its expiration date if all other variables are constant.
Theta indicates how much of the option's value is being lost.
It's usually expressed as a negative number for long positions.
Theta is good for sellers but it's bad for buyers.

How Theta Works

Theta is generally expressed as a negative number for long positions and a positive number for short positions. It is the daily amount by which an option's value is declining. For instance, a theta of -0.05 indicates that the option's price will decrease by five cents per day.

Options give the buyer the right to buy or sell an underlying asset at a predetermined price before the option expires. The strike price, also called the exercise price, is set when the contract is written. It is the price the underlying asset must reach before the option can be exercised.

Options Greeks, or simply “Greeks,” are invaluable pieces of information for options investors. The mathematical variables help investors calculate the risks that influence an option’s price, especially as it nears its expiration.

Fast Fact

Theta is one of the four interrelated "Greeks" that options traders use to evaluate the relative risk and potential rewards of an options contract. In addition to theta, they are delta, gamma, and vega.

The relevance of time

Time is relevant for option buyers as options are only exercisable for a set period. The option’s profitability decreases as time goes on. Theta measures the rate of time decay or the erosion of an option’s value as time passes.

What if two options are similar and one expires after a longer period? The value of the longer-term option is higher since there is more time during which the option could move above the strike price.

Theta is generally expressed as a negative number for long positions. The option's value diminishes as time passes until the option expires and reaches zero time value.

This is why theta is good for sellers and not so for buyers—value decreases from the buyer’s side as time goes by and increases for the seller.

Hence, selling an option is known as a positive theta trade: as theta increases, so do sellers’ earnings on their options.

Time Decay and Option Values

If all else remains the same, time decay causes an option to lose its extrinsic value or premium as it approaches its expiration date. Time is not on your side if you are a long option holder.

Time is on the side of the investor who writes options. Options become less valuable as the time to their expiration decreases. It is cheaper for option writers to buy back the options and close out the short position.

Put another way, option values are composed of extrinsic and intrinsic values. At option expiration, all that remains is the intrinsic value, if any, because time is a significant part of extrinsic value.

The Four Greeks

The Greeks altogether measure the sensitivity of options prices to their respective variables.

For instance, the delta of an option indicates the sensitivity of an option's price in relation to a $1 change in the underlying asset. The gamma indicates the sensitivity of an option's delta in relation to a $1 change in the underlying security.

Vega indicates how an option's price theoretically changes for each one percentage point move in implied volatility.

Important

Theta has other meanings in different fields. In economics, it refers to the reserve ratio of banks in economic models.

Example of Theta

Imagine you’re interested in buying a call option for a stock named TechCo. The stock is trading at $50, and you’re looking at a call option with a $52 strike price, expiring in 30 days. This option costs $2 per share, or $200 for a standard options contract that covers 100 shares.

Suppose the theta for this option is -0.05. If everything else (stock price, volatility, interest rates, etc.) stays the same, the option will lose five cents per day in value just because time is passing.

Fast forward 10 days, and you find that TechCo’s stock price hasn’t changed. If all else stayed the same, the value of your option should have decreased only because of theta or time decay.

Specifically, you’d expect a drop of 50 cents (10 days multiplied by the theta, -0.05) in the option’s price. That would mean your $2 option is now worth $1.50.

Hence, understanding theta helps you grasp how the ticking of the clock affects your options investments.

Time decay gradually erodes an option’s value as the expiration date approaches. Knowing this can help you make more informed decisions for your trading strategy.

Is Theta Good for Options?

It depends on whether you're buying or selling. As time passes, the option becomes cheaper, which is good for the seller. This option seller will profit if the underlying asset is neutral, bearish for a short call, and bullish for a short put.

Which Option Has the Highest Theta?

The highest theta is for at-the-money options, and the lowest is for the furthest out-of-the-money and in-the-money options. For an option that is at the money or nearly so, the absolute value of theta rises as the expiration date is reached.

Does Theta Decay on Weekends?

Yes, theta decays on weekends. Options models usually take into consideration weekends, so decay will occur over seven days, not the five trading days.

Can Theta Be Positive and What Would That Mean?

Theta can appear positive, particularly when you’re short (or “writing”) an option. If you’ve sold an option, the passage of time works in your favor, making the option less valuable—which is good when you eventually buy it back at a lower price or let it expire worthless.

In the case of selling options, while the theta of the option itself is technically negative, the effect on your position is positive.

How Does Theta React to Volatility in the Market?

Theta and volatility have a complex relationship. Generally speaking, when market volatility is high, option prices go up, which can also cause theta to increase. This is because the higher premium associated with the option will have more to lose each day as it approaches expiration.

However, an increase in theta doesn't necessarily mitigate the impact of rising volatility. In a volatile market, the option price can swing dramatically, overshadowing the slow erosion of time decay.

So, while theta might increase in a high-volatility market, the option's price could still rise if the increased volatility is even more significant.

The Bottom Line

In the options market, time decay is a noteworthy factor that can erode potential profits for buyers while benefiting sellers. Whether you're taking a long position buying an option or writing options, understanding theta can make the difference between a profitable trade and a losing gamble.

If you're an option buyer, time is not on your side since it gradually saps the value of your investment. If you're on the selling end, time decay is your ally, making it cheaper to close out your short position as the option's value decreases.

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