What is Theta Decay in Options?

Theta decay (time decay) is the rate at which an option loses value as it approaches expiration. For option sellers, this is how you make money.

How Theta Works

Every day, options lose a small amount of value:

  • Option worth $3.00 today
  • Tomorrow worth $2.95 (theta = $0.05)
  • You profit $0.05 by doing nothing

    • Theta Decay Curve

    Decay accelerates near expiration:

    | Days to Expiration | Decay Rate | 60 daysSlow 30 daysModerate 14 daysFast 7 daysVery fast | 1-3 days | Extreme |

    Why Sellers Love Theta

    As an option seller:

  • You sold for $3.00
  • Every day, option loses value
  • At expiration (if OTM): worth $0
  • Your profit: $3.00

    • Theta Example

    Sold $150 call for $4.00, theta = $0.08

  • Day 1: Option worth $3.92 (profit $0.08)
  • Day 10: Option worth $3.20 (profit $0.80)
  • Day 30: Option worth $0 (profit $4.00)

    • Maximizing Theta Decay

  • Sell 30-45 DTE - Good premium with accelerating decay
  • Close at 50% profit - Capture most decay quickly
  • Sell OTM options - Time value only, decays fastest
  • Avoid holding to expiration - Gamma risk increases