Theta
Theta is the option Greek that measures how much an option’s price falls for each day that passes, holding all else equal.
Theta quantifies time decay: it is the dollar change in an option’s premium per one-day decline in time to expiration. It is almost always negative for long options because options lose extrinsic value as expiration nears.
Decay is not linear — it accelerates in the final 30 days and is fastest for at-the-money options. A position with −0.05 theta loses about $5 per contract per day (×100 multiplier), all else equal.
Example. A 30-day at-the-money call priced at $2.00 with a theta of −0.04 loses roughly $0.04 of value overnight, to ≈ $1.96, if the underlying and implied volatility are unchanged.
FAQ
Is theta good or bad for option buyers?
Theta works against buyers and for sellers: a long option loses time value each day, while a short option gains it, all else equal.
When is theta highest?
Theta decay is largest for at-the-money options and accelerates in the last few weeks before expiration, per the CBOE Options Institute.
Related terms
See also: Covered Call