Option Theta Definition And Time Decay Chart

An Option Theta measures the rate of decline in a stock option due to the passage of time. Theta is also most commonly referred to as Time Decay. Theta belongs to a group of stock option measures called “the Greeks”. For the purposes of options trading, Theta is expressed in terms of the dollar value that a stock option will lose on a daily basis regardless of where the stock trades. Now of course you can make money with Theta as an option seller.

The diagram below gives us a perfect illustration of how theta decay works with options.  Notice how the slope falls off at its steepest during the last 30 days. This shows you visually how time decay actually “Speeds Up”.

We have also put up a recent option pricing table below (CLICK TO ENLARGE). As we mentioned before, options that expire in a few weeks have a very high Theta. These would be the Dec options that expire in 30 days have have daily Theta of .38 or higher. They are running out of time and the stock has to make its move quickly or it will become worthless.

On the other hand, options with a long time until expiration (like the Jan options which have 65 days left) generally have lower Theta as they have more time to move before expiration. These options have more value given to time decay and the possibility that the stock could make a major move.

  • Christine

    Can you go into the postive and negative theta numbers? I am assuming that if I bought an option ITM with positive theta than I would have time working for me? At least at that moment? Thanks

    • Kirk – Admin

      actually no…if you bought an option with positive theta it means that you are losing that amount of money each day (so if it was .08 then you lose $8 per day). So think of it reversed. When we say positive theta we actually are speaking of theta "working positively" in your favor, i.e. that time is on your side!

  • jonathan

    If i was to take on a membership with you, would i be able to benefit from your service given that i can’t open an account with think or swim. You seem to credit a lot your success to this platform, which leads me to feel i would be wasting my time trying to trade options with another site.

    please reply asap

    thank you.

    • Kirk

      It is a great platform but I have a lot of members who use other brokers. Namely TradeKing ans TradeMonster.

  • Chris

    what I am trying to determine is the rate at which the option loses value per day at say 6 months to expiration vs 60 days. The market seems crazy right now and I would prefer to lose or gain money based on the action of the market vs. time alone

    • http://optionalpha.com/ Kirk Du Plessis

      You can see this for each option by looking at theta for the 6 month contracts vs theta on the 60 day contracts. Each stock will be a little different.