Greeks
Theta
Also called: time decay
Theta is the amount an option loses in value each day from the passage of time alone, with all other inputs held constant. Long options have negative theta; short options collect it.
Theta is quoted per share per day: a theta of −0.05 means the contract sheds about $5 a day. Decay is not linear. For at-the-money options it accelerates in the final weeks before expiration, while deep in- or out-of-the-money options have already lost most of their extrinsic value and decay slowly.
Theta and gamma are two sides of one trade. Positions that profit from movement (long gamma) pay for it through theta; positions that collect theta (short options) are short gamma and exposed to large moves. Managing that balance is the core of premium-selling strategies.
Formula
Theta = ∂V / ∂t, usually reported per calendar day
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Frequently asked questions
Does theta decay happen over the weekend?
Calendar time passes, but market makers often price part of the weekend decay into Friday's closing quotes, so the observed Monday drop can be smaller than three days of theoretical theta.
Which options have the highest theta?
At-the-money options with 45 days or less to expiration. Their extrinsic value is largest and the time left to realize it is shortest.