Theta represents the measure for time decay of an option. Remember, an option price consists of intrinsic value and time premium. Theta measures the decay in time premium as every day passes until expiration. Therefore, we can say that the theta for a long call or put will be negative meaning that the options will lose time value everyday as time passes towards expiration. Conversely, the opposite can be said can for the short call and put, as time passes the positive theta will actually add to the value of a position. This is true because when you are long an option, you will lose money in that option every day all else being equal due to the time premium decaying. However, the time decay in a short option will increase your profits.

Theta does not adjust evenly as time goes on. Theta’s impact on a position’s value increases as time passes. The closer and closer the option is to expiration, the greater the time decay. Theta will accelerate at a higher rate especially when the option has less than 30 days to go. This also makes logical sense since the option has less time to get or stay in a profitable situation. Additionally, an options theta will be highest when the stock is at the money. Since the stock has basically no intrinsic value, the time value component is the majority of the premium and will fluctuate strongly as expiration approaches. The most pronounced time decay occurs in the last weeks and days prior to expiration.

Expiration and time decay are certainties making “net seller” or “credit” spreads our favorite options strategy. Remember, the value of an option is composed of time value and, if the option is in-the-money, it will also carry intrinsic value. By selling an option and holding the short position to expiration, you will only lose money if that option expires in-the-money.


No statement in this web site is to be construed as a recommendation  by Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667


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