Theta
The daily rate of time value erosion in an option's price, assuming all else stays constant. Usually negative for long options.
Formula
Θ = ∂V / ∂t (change in option value per one day of time passage)
Theta quantifies how much an option loses in value each calendar day due to the passage of time, all else being equal. A theta of −0.05 means the option loses $5 per contract per day from time decay alone.
Time decay accelerates as expiration approaches, especially for ATM options. This asymmetry is why option sellers favour short-dated contracts — they collect premium that decays fastest in the final weeks.
Long option holders are short theta: time is their enemy. Sellers are long theta: they earn the decay but must manage gamma risk.
Related Terms
Calendar Spread (Options)
Sell a near-dated option and buy a longer-dated option at the same strike. Profits from faster near-term theta decay and favorable IV term structure.
IntermediateExpiration Date
The last date on which an option can be exercised; after this date the contract ceases to exist.
IntermediateGamma
The rate of change of delta per $1 move in the underlying — it measures how fast delta itself accelerates.
AdvancedImplied Volatility
The market's forward-looking expectation of volatility, derived by solving the options pricing model for the volatility that matches the observed premium.
AdvancedIron Condor
A four-leg options strategy that sells an OTM call spread and an OTM put spread simultaneously, profiting when the underlying stays range-bound.
AdvancedThe Greeks
The collective name for the sensitivity measures — delta, gamma, theta, vega, rho — that describe how an option's price responds to changes in market variables.
IntermediateTime Value
The portion of an option's premium beyond its intrinsic value, reflecting the probability that the option moves further in the money before expiry.
IntermediateVega
The sensitivity of an option's price to a 1-percentage-point change in implied volatility.
Advanced