Theta
Also called: theta, time decay, option theta, daily decay.
Formula
Approximate premium change from time alone = Theta x Days elapsed.
How it is read
Theta is the reason a directional view that is right but late can still lose. Holding an option through a quiet period costs time value every session. That cost is usually described as speeding up into the final sessions. It is not usually described as running evenly. Theta is the counterweight to gamma. The arrangements that respond fastest to movement are the ones paying the most for time. That is the central trade-off in any option position.
What it does not tell you
Theta is an estimate at one instant from a pricing model. It is not a schedule anyone is committed to. Actual decay is not smooth. A change in implied volatility can add more value than a day removes. So a premium can rise on a day theta says it should fall. Theta also says nothing about direction. It says nothing about whether an option was worth its price to begin with.
See it in an experiment
See what time does to the premium
Change one input in Market X-Ray and watch what happens.
Market X-Ray: Expiry — What remains when an option reaches expiry?
Related concepts
Expiry Theta Trap: How Option Premium Decays
Theta is time decay: an option's premium erodes as expiry approaches, faster when the underlying sits still.
Open the lesson