Theta measures how much an option's price decreases each day due to the passage of time, all else being equal. It's expressed as a negative number for option buyers — a theta of −0.05 means the option loses $0.05 per share ($5 per contract) in time value each day. Time decay is unavoidable for options buyers, while option sellers collect it as daily income.
Why Options Lose Value Over Time
An option's premium has two components: intrinsic value (how far in-the-money it is) and time value (the probability-weighted chance of further gains before expiry). As expiration approaches, there are fewer trading days for a favorable price move to occur, so the market assigns less probability to the option finishing profitably, and time value decreases.
At expiration, an option has zero time value — its worth is purely intrinsic value (positive) or zero (if out of the money).
Theta Accelerates Near Expiration
Theta is not linear — it accelerates dramatically in the final 30 days before expiration, and especially in the last two weeks. An option with 90 days to expiry might lose $5 per day to theta. The same option with 10 days to expiry might lose $15–20 per day. This is why option buyers often close positions before the final 30 days to avoid the fastest decay period.
Who Benefits from Theta
Option sellers benefit from theta — they collect premium upfront and profit if the option expires worthless (or they buy it back cheaper). Covered calls, cash-secured puts, credit spreads, and iron condors are all strategies built on collecting theta. The risk for sellers is unlimited (for naked calls) or capped (for defined-risk strategies) if the underlying moves against them.
Option buyers pay theta every day. To profit, the underlying must move enough in the right direction to overcome both the premium paid and the ongoing daily decay. Buyers need to be right about direction, magnitude, and timing — all three. Sellers only need to be right that the move won't exceed their breakeven.