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.