Theta

Theta is the estimated amount an option's price declines each day as time passes, assuming the stock price and implied volatility stay the same. It is usually shown as a negative number for option buyers: a theta of -0.05 means the option is expected to lose about $0.05 per share ($5 per contract) per day.

How it works

Only time value decays; intrinsic value does not. That means:

• At-the-money options, which are almost all time value, have the largest theta in dollar terms.
• Decay accelerates as expiration approaches. An ATM option with a few weeks left loses value far faster than one with several months left.
• Sellers earn theta. Anyone short an option has positive theta and benefits from the passage of time, which is the basic logic behind strategies like the covered call.

Theta trades off against gamma. Positions with high positive gamma usually pay for it with high negative theta, and vice versa.

Why it matters for traders

Theta is the daily cost of holding an option. Buyers need the stock to move far enough and soon enough to outrun it, which is why short-dated options bought too early ahead of a catalyst can bleed value while the trader waits. Sellers collect theta but accept the risk of a sharp move against them.

Weekends and holidays count: pricing models generally decay options over calendar days, though market makers often price some of that decay into Friday's quotes.

Example

Fabrikam Software (FBKM) trades at $70. The $70 call expiring in 10 days costs $2.00 with a theta of -0.09.

If FBKM stays flat and implied volatility does not change, the call should be worth about $1.91 tomorrow. Over the 10 days its full $2.00 of time value goes to zero, and the daily loss grows as expiration nears.

FAQ

Do options lose value over the weekend?

Time decay accrues over calendar days, so the weekend counts. In practice, much of that decay tends to be reflected in prices before Monday's open.

When does theta decay speed up the most?

In the last few weeks before expiration, and most dramatically in the final days for at-the-money options.