Glossary
Theta
The option Greek that estimates how much an option’s price falls with each day that passes, all else equal; the measure of time decay.
On this page
Theta measures how much value an option loses as one day passes, with the stock price, volatility and interest rates held constant. It is usually quoted as a negative number for an option you own: a theta of −0.05 means the option should lose about 5 cents of premium per share each day. Theta is the reason buying options is a race against the clock and selling them is a way to be paid for waiting.
How it works
Only the time value part of a premium decays; intrinsic value does not. Time value shrinks slowly when expiration is months away and quickly in the final weeks, so theta grows larger, in absolute terms, as expiration nears. It is largest for at-the-money options, which carry the most time value, and smaller for deep in-the-money or far out-of-the-money contracts.
Reading theta in context
Theta trades off against gamma. Short-dated at-the-money options have high gamma, so their value reacts strongly to stock moves, and high theta, so they bleed fastest when the stock sits still. Option sellers collect theta but take on that gamma risk. Theta is also an estimate from a pricing model, and real prices move with implied volatility too: an option can lose far more than its theta overnight if volatility collapses after an earnings report. Platforms differ on whether theta counts calendar days or trading days, which changes the weekend effect.