Theta

Theta measures how much an option price is expected to decline per day as time passes, assuming all other factors remain unchanged. It is often called time decay.

What is theta?

Theta is the partial derivative of the option price with respect to time. It is usually expressed as the expected change in premium per calendar day or per trading day. For long options, theta is typically negative because extrinsic value erodes as expiration approaches. For short options, theta is positive because the seller benefits from that erosion. Theta affects mostly the extrinsic portion of the premium; deep in-the-money options with little time value have smaller theta.

How to measure theta

Theta is computed by option pricing models alongside other Greeks. Platforms show theta as a dollar amount per contract per day—for example, theta of -0.05 means the option loses about $5.00 per day on a 100-share contract if other inputs stay fixed. Portfolio theta is the sum of theta across all legs, weighted by contract size. Some platforms report theta per calendar day, others per trading day, so compare values using the same convention.

How theta changes

Theta accelerates as expiration nears, especially for at-the-money options. Far-dated options decay slowly at first, then lose extrinsic value faster in the final weeks. Theta is not constant—it changes with stock price, volatility, and time. Weekend and holiday effects can make daily theta uneven. Short-dated weekly options near the strike often show the largest negative theta for long premium positions.

How option prices change when theta changes

When theta becomes more negative, long options lose value faster with the passage of time even if the stock is unchanged. When theta is less negative or turns positive on short positions, time decay works in the seller's favor. For example, a long straddle with combined theta of -0.20 loses about $20 per day per contract from time alone. Traders selling premium seek positive net theta; buyers of options fight negative theta and need sufficient price or volatility movement to offset daily decay.