Theta — Concept Explainer Video

Transcript

The clock has a price

Theta estimates the change in option value as time passes, with other inputs held fixed. For many purchased options it is negative. Think of paying for a limited window of opportunity: as that window shrinks, part of its value can fade.

A one day estimate

Suppose an option is worth three dollars and its theta is minus four cents per calendar day. If the other inputs stay unchanged, tomorrow's estimated value is about two dollars ninety six. A one hundred share contract loses about four dollars.

It is not a straight line

Do not multiply today theta by thirty and treat it as a reliable monthly forecast. Theta changes with moneyness, time, and volatility. Time decay often becomes faster near expiration for options near the money, but that pattern is not universal.

Positive theta is not guaranteed income

Selling an option reverses its position theta, but does not remove the risk. A sudden stock move or volatility increase can overwhelm the benefit from one day passing. Some option types and carry conditions can also produce different theta signs.

Read the clock with the other Greeks

Check whether theta is per calendar day, trading day, or year, and whether it is quoted per unit or contract. Use consistent units. Then assess theta alongside delta, gamma, and vega to understand what you are being paid to risk.