Theta (Time Decay)

Category: science

The rate at which the value of an option declines as the time toward expiration decreases.

Theta is the "rent" paid for time. An option has intrinsic value and time value. Time value erodes as the expiration date nears, accelerating in the final 30 days. Option sellers ("writers") profit from Theta decay, while option buyers must see significant price movement to overcome the daily erosion.

Common Examples

• The portfolio’s short-option strategy generates consistent income by capturing the aggressive Theta decay in the final weeks before expiration.
• If the stock price remains stagnant, Theta decay will consume the entire value of the long call position by the expiration date.