Theta

In plain words

Theta shows how much money an option loses each day purely from the passage of time (all else equal).

In more detail

Theta measures an option's daily loss of value from the passage of time. For buyers it is a running cost, for sellers the source of income. The nonlinear path matters: for at-the-money options time decay accelerates markedly in the final weeks, while for far out-of-the-money options it bites hardest early. Whoever wants to collect theta therefore typically sells maturities between 30 and 45 days.

Formula

Θ = ∂V/∂t

The partial derivative of the option price with respect to the remaining time to expiration (usually expressed as a negative value per day).

Example

An at-the-money option with 45 days left loses 0.04 euros a day. With 7 days left it is 0.11 euros — the same option, almost triple the daily decay.

What it means for traders

The basis for many income strategies (covered calls, iron condors) that deliberately profit from time decay.

Common pitfalls

Pure theta strategies can lose their entire theta gain to sudden volatility or price jumps (vega/delta risk).

Related terms

Calendar Spread · Covered Call · Premium Decay · Time Decay · Time Value · Time Value of an Option (Time Premium)