Theta, the number behind time decay

An earlier lesson covered time decay conceptually: options lose value as expiry approaches, all else being equal, simply because there's less time left for anything to happen. This lesson picks that idea back up and puts an actual number on it. That number is theta.

Theta measures how much an option's price is expected to fall for each day that passes, assuming the underlying and implied volatility don't move at all. It's usually quoted as a negative number for anyone holding an option, and it's normally expressed per share, per day, so it needs multiplying by 100 for a standard contract.

A simple example. An option is priced at $2.00 and shows a theta of -0.05. If nothing else changes, you'd expect that option to be worth roughly $1.95 tomorrow, then about $1.90 the day after, purely from one more day passing. On a single contract, that's about $5 a day leaking out of the option's value.

Theta isn't a constant number

It's tempting to treat theta as a fixed daily charge, but it isn't. Theta itself changes as expiry gets closer, and it generally accelerates: an option with 30 days left might show a theta of -0.03, while the same option, all else equal, might show -0.10 with only 5 days left. That's the non-linear decay curve behind the phrase "time decay speeds up near expiry." Most of an option's remaining time value tends to evaporate in the final week or two, not spread evenly across its life.

Theta is largest at the money

Theta also isn't the same across every strike. It's typically largest for at-the-money options, the ones with the most time value packed into their price, and smaller for options that are deep in or out of the money. That's worth knowing when comparing two positions: a deep out-of-the-money option might barely decay at all in dollar terms, even close to expiry, simply because there isn't much time value left in it to lose.

Buyers pay it, sellers collect it

Theta is the same number viewed from two sides of a trade. An option buyer is on the losing end of theta: it works against a long position every single day, all else equal. An option seller is on the other side of that same contract, so the same decay that costs the buyer is effectively collected by the seller. That's a large part of why selling options rather than buying them has time working in the seller's favour rather than against it.

Rule of thumb. When you're comparing similar setups, a higher (more negative for a buyer) theta means a faster daily bleed. If you're a seller, that same number is roughly what you're collecting each day the position sits still. Either way, don't just glance at theta once; check how it's likely to change as expiry approaches.

What this doesn't mean

It doesn't mean theta decay happens in a straight line. It accelerates as expiry gets closer, it doesn't chip away at the same rate every day.
It doesn't mean a seller automatically profits just because theta is positive for them. The underlying can still move against the position faster than theta helps it.
It doesn't mean theta acts alone. It's calculated holding the underlying's price and implied volatility still, and in a live market neither of those actually stays fixed.