Theta (Options)

Theta quantifies an option's sensitivity to the passage of time, expressed as the dollar amount the option's price decreases per day, all else being equal. For example, a theta of -0.05 means the option loses $0.05 in value each day. Theta is always negative for long option positions (time works against buyers) and positive for short option positions (time works in favor of sellers). Time decay accelerates as expiration approaches, particularly for at-the-money options, which have the highest theta. This acceleration follows a non-linear pattern — roughly half of an option's time value erodes in the final third of its life. Option sellers (writers) exploit theta decay as a primary profit source, while option buyers must overcome theta to profit. Understanding theta is essential for selecting appropriate expiration dates, timing entries and exits, and constructing strategies like calendar spreads that capitalize on differential time decay.