What Is Theta?
Theta is the daily rate at which an option's extrinsic value decays. A call with theta -0.05 loses about $5 in value per contract per calendar day, all else equal. Theta is negative for option buyers (they lose to time) and positive for option sellers (they earn from time).
Theta accelerates as expiration nears. An option that loses $0.02/day with 60 days to expiration may lose $0.10/day in its final week. This convex decay curve is why short-dated options are the workhorse of income strategies — the daily premium earned ramps higher closer to expiry.
Theta and gamma trade off: long-gamma positions pay theta, short-gamma positions earn it. A trader who's right about volatility but wrong about timing can still lose to theta. Managing theta means choosing the right expiration: closer for income strategies, further for directional plays where time is needed.
Related terms
- Delta — Sensitivity of an option's price to a $1 change in the underlying.
- Gamma — Rate of change of delta — measures how fast directional exposure shifts.
- Vega — Sensitivity of an option's price to a 1-point change in implied volatility.
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.