Θ Theta

Theta (Θ), often called “time decay,” is an options greek that tells you how much an option’s price is expected to decrease each day due to the passage of time.

Options lose value every day, even if the underlying stock doesn’t move. Theta Θ quantifies this daily loss as a number.

It’s like a built-in “expiration clock” ticking down. As an option gets closer to its expiration date, its time value erodes at an accelerating pace. 

Theta is usually expressed as a negative number. For example, a theta of -0.05 means the option’s price is expected to decline by $0.05 per day, with all other factors not drastically changing very much.

Why does time decay happen?

Options derive part of their value from the “time premium” – the possibility that the related stock price will move favorably before expiration. As time passes, there’s less time for that favorable movement to occur, so the option’s value decreases.

Key things to remember about Theta

• It accelerates as expiration approaches: The rate of time decay is slowest when an option has a lot of time left until expiration and speeds up significantly in the last few weeks or days.
   
• Out-of-the-money (OTM) and At-the-money (ATM) options have higher theta: These options have more time value component compared to in-the-money (ITM) options, making them more susceptible to time decay.
   
• Options sellers benefit from theta: If you sell an option, you profit from its time decay, as its value drops over time.
   
• Options buyers are hurt by theta: If you buy an option, you are fighting against theta, as it constantly erodes the value of your holding.
   

In essence, Theta is the enemy of the option buyer and the friend of the option seller. It’s a crucial concept for anyone trading options to understand, as it significantly impacts profitability, especially for short-term trades.

There is a whole forum for people who trade around Theta on Reddit (social media platform) called r/thetagang. Their motto is “We are selling options to WSB degenerates using thetagang strategies!” I use this forum fairly frequently to see ideas, and what people are doing. When I was initially learning about Theta, I would read about it more. As time passed, I realized it has a fair share of it’s own degenerates and also purists. Some of the people who feel like they govern that mentality are unable, or unwilling to accept strategies that stray too far from their favorite “wheel” or 45-60 day strategies. All things considered though, it’s a good resource to subscribe to as you will read about experiences from one end of the spectrum to another. Newbies, and pros alike, everyone seems to be welcome to post there.