Theta

Theta is one of the option Greeks. It estimates how much an option's price falls each day just from time passing, if the stock price and implied volatility do not change. It is usually shown as a negative number for options you own, since time working against you means losing value.

This loss of value over time is called time decay. Every option, whether it ends up worthless or valuable, loses its remaining time value as expiration approaches.

Say an option is priced at $3.00 and has a theta of -0.05. If nothing else changes, you would expect it to be worth about $2.95 tomorrow, purely from one day passing. Over a week of no other movement, that adds up to roughly $0.35 lost to time decay alone.

In practice the stock price and implied volatility are moving too, so the option's actual price rarely matches this exactly, but theta tells you the daily drag working against a long option holder. These are made-up numbers, not a live quote.

Time decay is not a straight line. It tends to be slow when an option has months left, and it accelerates as expiration gets close, especially for options at or near the money. This is why many traders say theta "eats faster" in the final weeks of an option's life.

Deep in-the-money and far out-of-the-money options tend to have smaller theta, since they have less time value left to lose in the first place.

Theta works against anyone who owns an option outright, whether a call or a put: every day that passes without enough movement chips away at the position. It works in favor of anyone who sold an option, which is the idea behind income strategies like covered calls, cash-secured puts and credit spreads.

This is one reason option sellers can profit even when the stock barely moves, while option buyers need the stock to move enough, and soon enough, to overcome the decay.