Theta

Theta measures how much an option loses value each day simply from the passage of time, making it the most important Greek for income traders. Often called “time decay,” theta is why options are considered wasting assets – they lose value every single day, even if the stock doesn’t move. For option sellers, theta is your best friend, generating profits while you sleep. For option buyers, it’s the relentless enemy that erodes your position value. Understanding and harnessing theta is the key to consistent income generation through options.

How Theta Works

Theta is expressed as a negative number for long positions:

  • A theta of -0.05 means the option loses $5 per day
  • A theta of -0.10 means the option loses $10 per day

For short positions, theta is positive:

  • Selling an option with 0.05 theta earns you $5 per day
  • Selling an option with 0.10 theta earns you $10 per day

This daily decay occurs regardless of stock movement.

The Theta Decay Curve

Time decay isn’t linear – it accelerates as expiration approaches:

45+ Days to Expiration: Slow, steady decay

  • Minimal daily impact
  • Theta around -0.02 to -0.05

45-21 Days: Decay accelerates

  • Noticeable daily erosion
  • Theta around -0.05 to -0.10

21-7 Days: Rapid decay

  • Significant daily losses
  • Theta around -0.10 to -0.20

Final Week: Maximum decay

  • Severe daily erosion
  • Theta can exceed -0.30

Visual Example

$1.00 ATM option premium decay:

  • Day 45: $1.00 (lose ~$0.02/day)
  • Day 30: $0.82 (lose ~$0.04/day)
  • Day 14: $0.55 (lose ~$0.08/day)
  • Day 7: $0.35 (lose ~$0.12/day)
  • Day 1: $0.10 (lose everything)

Theta by Strike Price

Theta varies by moneyness:

ATM Options: Highest theta

  • Most time value to lose
  • Maximum decay rate
  • Riskiest for buyers

ITM Options: Moderate theta

  • Less time value
  • More intrinsic value
  • Slower decay rate

Far OTM Options: Lower theta

  • Little premium to decay
  • But high percentage decay
  • Often go to zero

Comparison Example

XYZ at $50, 7 days to expiration:

  • $48 put (ITM): -0.08 theta
  • $50 put (ATM): -0.15 theta
  • $52 put (OTM): -0.05 theta

The ATM option loses value fastest in dollar terms.

Weekend Theta

Markets are closed weekends, but theta never stops:

Friday Close: Option worth $0.50 Monday Open: Option worth $0.35

Three days of decay occurred (Friday night through Monday morning), making weekends especially profitable for sellers.

Weekly Income Strategy

Sell options on Thursday/Friday:

  • Collect 3 days of theta over weekend
  • 43% of weekly decay in 2 days
  • Popular with income traders

Theta and Volatility

High implied volatility increases theta:

  • More premium = more to decay
  • Earnings plays have extreme theta
  • IV crush multiplies theta effect

Earnings Example

Option before earnings: $3.00 premium, -0.30 theta Option after earnings: $1.00 premium (IV crush + theta) Seller profits from both volatility collapse and time decay.

Using Theta for Income

Systematic theta collection generates consistent returns:

Weekly Put Selling Example

Sell 10 XYZ $48 puts for $0.50 each:

  • Collect $500 premium
  • Average theta: 0.07 per contract
  • Daily income: $70 (10 × $7)
  • Weekly income: $350 from theta alone

If stock stays flat, you keep most premium from pure time decay.

The Theta/Gamma Tradeoff

High theta comes with high gamma risk:

  • ATM options: Maximum theta but highest gamma
  • Stable stocks: Theta income safer
  • Volatile stocks: Gamma risk can overwhelm theta

Balance is key – chase theta on stable underlyings.

Optimal Theta Harvesting

30-45 DTE: Sweet spot for sellers

  • Decent premium
  • Manageable gamma risk
  • Time to adjust if needed
  • Close at 50% profit

7-14 DTE: Aggressive theta collection

  • Maximum decay rate
  • Higher gamma risk
  • Requires active management
  • Weekly income focus

Managing Theta Positions

For Sellers (positive theta):

  • Let time work for you
  • Don’t panic on small moves
  • Close winners at 50% profit
  • Roll challenged positions early

For Buyers (negative theta):

  • Fight decay with movement
  • Exit if thesis isn’t working
  • Don’t hold through final week
  • Size positions smaller

Theta in Popular Strategies

The Wheel:

Iron Condors:

  • Double theta collection
  • Profit from range-bound stocks
  • Maximum theta, defined risk

Calendar Spreads:

  • Buy long-term (low theta)
  • Sell short-term (high theta)
  • Harvest decay differential

Common Theta Mistakes

Buyers Ignoring Decay: Holding too long Sellers Getting Greedy: Not taking profits Wrong Timeframe: Fighting severe final week decay Poor Stock Selection: High theta on volatile stocks

Building a Theta Portfolio

Diversify theta collection across:

  • Multiple underlyings
  • Different sectors
  • Various expiration dates
  • Balanced deltas

Example Theta Portfolio

$50,000 account selling weekly puts:

  • 5 positions × $10,000 each
  • Target 0.25 delta, 1% weekly
  • Combined theta: $350/day
  • Annual projection: $91,000 (182%)

Reality: 30-50% annually after losses/adjustments.

Theta Psychology

For Sellers: Patience pays

  • Every day profits you
  • Small gains compound
  • Time is your ally

For Buyers: Urgency required

  • Every day costs you
  • Need quick movement
  • Time is your enemy

Key Takeaways

Theta:

  • Measures daily time decay
  • Negative for buyers, positive for sellers
  • Accelerates near expiration
  • Highest for ATM options
  • Never stops (including weekends)
  • Foundation of income strategies

Theta is the income trader’s edge – while buyers need to predict direction and timing correctly, sellers profit from the simple passage of time. Master theta, and you master the art of consistent option income generation.