◈ GLOSSARY · TRADING & MARKETS
Time Decay (Theta).
A definition, in plain English — with the books that teach it.
ClearValue Books · reviewed against sources ·
◈ DEFINITION
What it means
Definition
The rate at which an option loses value each day, all else equal, as expiration approaches. Theta is expressed as the dollar amount the option's price will drop per day. Decay accelerates in the final weeks — which is why long-dated options behave very differently from weeklies, and why being a net buyer of short-dated options is structurally expensive.
◈ IN PRACTICE
Example
A call option priced at $2.00 with a theta of -0.05 will lose roughly 5 cents per day if the stock doesn't move — $5 per contract per day. A week of sideways trading and that $200 contract is worth around $165.
◈ RECOMMENDED READING
