Theta measures how much value an option loses each day from the passage of time alone. It is the price of waiting.
Decay is not a straight line
An option with three months left loses value slowly. The same option in its final two or three weeks loses value much faster, especially if it is at the money. That curve is why short-dated options look cheap and why they so often expire worthless.
What it means for buyers
- Give your trade enough time to work. Buying a little more time often costs less than it seems.
- Avoid holding ATM options through the final days unless you expect a quick move.
- Weekends and holidays count. Option prices start to price that in before the break.
What it means for sellers
Sellers earn theta, which is why many premium-selling strategies use 30 to 45 days to expiry and close early. But theta is paid for by taking on gamma risk: a sharp move can wipe out weeks of decay in one day.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.