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Technical Indicators

Theta (Time Decay)

The amount an option loses in value each day from time passing. Accelerates as expiration approaches.

What is theta?

Theta is the amount an option's price decreases each day from the passage of time, all else equal. It is one of the Greeks, and it measures time decay.

Theta is almost always negative for option buyers (you lose value as time passes) and positive for option sellers (you gain). It is quoted as a dollar amount per share, so a theta of -0.05 means the option loses about $5 in total value per day (-0.05 times 100 shares per contract).

How theta changes

  • It accelerates toward expiration. A 30-day option might have theta of -0.03 per share. Five days out, the same option's theta might be -0.08 or worse. The last week is brutal on long options.
  • ATM options have the highest theta. They carry the most extrinsic value, so they have the most to lose.
  • Deep-ITM options have low theta. Most of their value is intrinsic, which does not decay.

Practical implications

If you buy options, theta is always working against you. Short-dated OTM options can lose 5 to 10 percent of their value per day even if the stock sits still. Giving your thesis enough time (2 to 4 weeks minimum for beginners) keeps theta from killing the trade before you are right.

Related Terms

0DTE (Zero Days to Expiration)

Options that expire the same trading day they are held. Cheap, volatile, and dominated by time decay.

Expiration Date (Options)

The last day an option contract is valid. After this date, unexercised options expire worthless.

Extrinsic Value (Time Value)

The portion of an option's price that is not intrinsic value. Decays to zero at expiration and is driven by time and implied volatility.

IV Crush

A sharp drop in implied volatility that can cause an option to lose value even when the stock moves in your direction.

Options

Contracts that give the buyer the right, but not the obligation, to buy or sell a stock at a specific price before a specific date.

The Greeks (Options)

A set of risk metrics for options: Delta (direction), Gamma (acceleration), Theta (time decay), and Vega (volatility sensitivity).