Theta (Theta) is the Greek that measures how much value an option loses each day from the passing of time alone, with everything else held constant. It is the buyer's enemy and the seller's friend.
Why does an option decay over time?
An option's price is made of intrinsic value (Intrinsic) and time value (Time Value). Time value evaporates gradually until it reaches zero at expiration, because the chance of the forecast coming true shrinks as time runs short.
Decay is not linear: it speeds up near expiration
Contrary to popular belief, an option does not decay at a steady pace. Decay is slow when expiration is far away, then speeds up sharply over the last 30 days, and becomes brutal in the final days, especially in same-day contracts (0DTE).
- Theta −0.05: means losing $5 a day per contract (0.05 × 100).
- Weekends: Theta is counted for Saturday and Sunday too, even though the market is closed.
How do you avoid the theta trap?
If you are a buyer: avoid short-dated contracts unless you expect a strong move soon, and choose longer expirations (45 days or more) to ease the decay. If you are a seller: use theta by selling contracts close to expiry (30 to 45 days) to collect the premium as decay speeds up in your favor.
