Stock Option Greeks: Theta Explained

Theta measures the rate of time decay in the value of an option or its premium. Time decay represents the erosion of an option's value or price due to the passage of time. As time passes, the chance of an option being profitable or in-the-money lessens. Time decay tends to accelerate as the expiration date of an option draws closer because there's less time left to earn a profit from the trade.

Theta is always negative for a single option since time moves in the same direction. As soon as an option is purchased by a trader, the clock starts ticking, and the value of the option immediately begins to diminish until it expires, worthless, at the predefined expiration date.

Theta is good for sellers and bad for buyers. A good way to visualize it is to imagine an hourglass in which one side is the buyer, and the other is the seller. The buyer must decide whether to exercise the option before time runs out. But in the meantime, the value is flowing from the buyer's side to the seller's side of the hourglass. The movement may not be extremely rapid, but it's a continuous loss of value for the buyer.

Theta values are always negative for long options and will always have a zero time value at expiration since time only moves in one direction, and time runs out when an option expires.


In March, a September option will have a daily time decay of .02. By August, the daily decay will increase to .06 and the option more quickly decays.

Time decay is not linear, and moreover, for ATM strikes decay continually accelerates into option expiration.