The option's theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day.


A call option with a current price of $2 and a theta of -0.05 will experience a drop in price of $0.05 per day. So in two days' time, the price of the option should fall to $1.90.

Passage of time and its effects on the theta

Longer term options have theta of almost 0 as they do not lose value on a daily basis. Theta is higher for shorter term options, especially at-the-money options. This is pretty obvious as such options have the highest time value and thus have more premium to lose each day.

Conversely, theta goes up dramatically as options near expiration as time decay is at its greatest during that period.

Changes in volatility and its effects on the theta

In general, options of high volatility stocks have higher theta than low volatility stocks. This is because the time value premium on these options are higher and so they have more to lose per day.

Volatility and its Effects on Option Theta

The chart above illustrates the relationship between the option's theta and the volatility of the underlying security which is trading at $50 a share and have 3 months remaining to expiration.

Back: The Greeks

Ready to Start Trading?

Open an account at and get 100 commission-free trades + free virtual trading tool!

Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.

Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)

Click here to open a trading account at now!

Follow Us on Facebook to Get Daily Strategies & Tips!

The Greeks

Options Basics

Options Strategies

Options Strategy Finder

Outlook on Underlying:

Profit Potential:

Loss Potential:


No. Legs:

Join the Discussions @ The Options Forum

Beginners Questions

Advanced Strategy Talks

RSS Feed Widget

Trading Ideas & Opportunities

Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. - All Rights Reserved.