What is Time Decay (Theta) in Options, and How Does it Affect My Trade?

In this episode of the Options Trading Podcast, we answer the community question: "What is time decay (Theta) in options, and how does it affect my trade?"

Join us as we demystify the silent but powerful force of time decay, or Theta, and reveal how it impacts every options trader. We'll unpack what Theta is, why it happens, and what it means for you whether you're buying or selling options. We also highlight the free daily newsletter, Option Picks, and a free training on a powerful options strategy at we love options.com/passive trading.

Don't let time be your enemy. Learn to use it to your advantage. What's one options strategy you've found that works best with or against time decay? Let us know!

Key Takeaways

• Theta is the measure of time decay: Theta is the Greek letter that quantifies how much an option's premium is expected to drop each day due to time passing.
• Time decay works against buyers and for sellers: As an options buyer, you are in a race against the clock, as Theta erodes the value of your option. As a seller, Theta is your tailwind, as the decaying value of the option works in your favor.
• Decay accelerates near expiration: Time decay is not linear; it speeds up dramatically, especially in the final 30-45 days before an option expires.
• Theta works 24/7: Time decay happens even over the weekend when markets are closed, with the effect often priced in by Monday morning.
• Implied Volatility (IV) interacts with Theta: IV can temporarily prop up an option's price, masking Theta's effect. However, a sharp drop in IV (IV crush) can combine with Theta decay to create a "double whammy" for buyers.

"As an options buyer, you don't just need the stock to move your way. You need it to move enough, and fast enough, to make up for that daily fade of value before the option expires."