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What is theta in options?
Learn what option theta estimates, why time decay is not linear, and how expiration changes the result
Prepared by Mark · Primary sources below
Direct answer
Theta estimates how much an option's theoretical value may change after one day passes, assuming the stock price, implied volatility, rates, and other model inputs stay the same. Long options generally have negative theta and short options generally have positive theta. It is a changing model estimate, not a guaranteed daily charge, and time value often erodes faster as expiration approaches
Theta is a sensitivity, not a bill
A theta of -0.08 means the pricing model estimates an eight-cent decline in the option's value over one day if its other inputs do not change. Markets rarely hold every input constant, so the next observed premium can rise even when a long option has negative theta
The decay curve changes with the contract
Time value does not disappear in equal daily installments. Moneyness, remaining time, and implied volatility shape the curve; an at-the-money option close to expiration can lose time value differently from a deep in-the-money or long-dated contract
Use checkpoints instead of multiplying blindly
Multiplying today's theta by the number of days remaining assumes theta itself never changes. A more useful comparison reprices the contract at several future dates while keeping the stock and volatility assumptions visible
Common questions
Does theta reduce an option every night?
Theta describes an all-else-equal model change over time. The market premium can move differently because the stock, implied volatility, rates, dividends, and quotes also change
Is theta always bad?
Negative theta is a cost for a long option under unchanged conditions, while a short option can have positive theta. Neither sign describes the position's total risk or expected return
Sources and further reading
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