August 12, 2025 • 17 mins
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."
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
We're digging into a topic today that you've shared
some great sources on, and it'swell.
It's a really powerful kind ofsilent force affecting anyone.
Trading options.
Speaker 3 (00:26):
Yeah, it really is.
The sources consistently pointto this idea of how options just
relentlessly lose value as timeticks by.
Speaker 2 (00:33):
Exactly, and that's the world of time, decay, or you
know the Greek term, theta.
It's one of those crucialfactors, maybe sometimes a bit
underestimated.
Speaker 3 (00:41):
Definitely underestimated.
Sometimes it massively impactswhether a trade works out or not
.
Speaker 2 (00:46):
So our goal here, our mission for this deep dive, is
to really unpack theta.
You know what is it, why doesit actually happen and,
crucially, what does it mean foryou when you're trading options
, whether you're buying them orselling them?
We're pulling insights straightfrom the material you sent over
.
Speaker 3 (01:01):
And understanding.
It is just fundamental, it'sthis constant downward pressure
on option prices.
Speaker 1 (01:07):
Yeah.
Speaker 3 (01:07):
You, really, you just can't ignore it.
It's working every single day.
The market's open even whenit's not.
Speaker 2 (01:12):
Okay, so let's start with the basics.
What is time decay?
Fundamentally.
Speaker 3 (01:16):
Well, think about it like this Every option contract.
It has an expiration date.
Right, that makes it what wecall a wasting asset.
A wasting asset Meaning itslifespan is limited.
As that expiration date getscloser, the option inherently
loses some value, just becausethere's less time left for
things to happen.
Speaker 2 (01:33):
And theta is how we actually measure that.
Speaker 3 (01:35):
Precisely, Theta is the Greek letter, the specific
number that tells you how muchan option's price, its premium,
is expected to drop per day justdue to time passing, assuming
you know nothing else changes,like the stock price or
volatility.
Speaker 2 (01:49):
OK, so the sources give an example.
If an option has a theta of,say, minus 0.05, minus 0.55,
what does that mean in realmoney terms?
Speaker 3 (01:58):
Right.
That 0.05 tells you that, allelse being equal, that specific
option contract is expected tolose $5 in value today $5
because one contract is 100shares.
Exactly.
You take that theta value nano0.05, multiply by 100.
So boom, $5 potentially gonefrom the options premium just
because a day went by.
Speaker 2 (02:17):
Wow, okay, that really clarifies it.
Five bucks a day, potentiallyjust vanishing.
And that immediately shows thecore dynamic, doesn't it?
Theta works against the optionbuyer.
Speaker 3 (02:28):
Absolutely against the buyer.
You paid a premium for thatoption and Theta is like this
constant little leak eroding thevalue of what you bought.
Speaker 2 (02:35):
It works for the option.
Seller.
Speaker 3 (02:37):
Correct.
The seller got paid thatpremium up front.
So as the option decays, as itsvalue drops because of time,
that decay works in the seller'sfavor.
They're essentially profitingpotentially from that time value
disappearing.
Speaker 2 (02:51):
Okay, that makes sense.
But why does time have thiseffect?
What's the engine driving thisdecay?
Speaker 3 (02:57):
Fundamentally it boils down to probability.
An option's value a big chunkof it anyway is based on the
chance that the underlying stockwill move enough before
expiration for the option to beprofitable or in the money.
Speaker 2 (03:10):
Right.
So more time means more chances.
Speaker 3 (03:13):
Exactly More time equals more opportunity for the
stock price to make a big move,either up or down.
The potential range of outcomesis wider.
But as that expiration datelooms closer, but as that
expiration date looms closer,that window of opportunity
shrinks.
The probability of asignificant move happening in,
say, the next five days is muchlower than over the next five
months.
Speaker 2 (03:32):
So the decreasing probability lowers the option's
value.
Speaker 3 (03:36):
Precisely that reduction in potential, in
probability gets reflected as alower option price and that
steady decrease is time decay,driven by theta.
Speaker 2 (03:46):
And this is especially true for options that
are out of the money right OTMoptions.
Speaker 3 (03:50):
Oh, absolutely OTM options.
They have zero intrinsic value.
Their price is purely extrinsicvalue, which is basically time
value plus implied volatility.
It's that time value componentthat's most vulnerable, the part
that really melts away day byday because of theta.
Okay, now here's something thesources component that's most
vulnerable, the part that reallymelts away day by day because
of theta.
Speaker 2 (04:06):
OK, now here's something the sources highlight.
That's really interesting,maybe a bit counterintuitive.
This decay, it doesn't happenevenly, does it?
It's not like a smooth,straight slide down.
Speaker 3 (04:14):
No, not at all, and that's a critical point to grasp
.
When an option has like sixmonths or a year left until it
expires, the theta value isusually pretty small.
The daily loss is almostnegligible sometimes compared to
the overall price.
Speaker 2 (04:27):
But that changes.
Speaker 3 (04:28):
Oh, it changes dramatically as you get closer
and closer to that expirationdate, the rate of decay actually
speeds up, it accelerates.
Speaker 2 (04:36):
And the source is really zeroed in on that last 30
days or so.
Speaker 3 (04:39):
Yes, that final month .
That's often called theacceleration phase.
Inside those 30 days, maybe 45,theta really kicks into high
gear.
Yeah, especially for at themoney and out of the money
options, the daily value lossbecomes much, much more
significant.
Speaker 2 (04:53):
Premiums can just evaporate very quickly so
thinking about that, an optionexpiring way out, maybe six
months from now, it might losejust pennies per day, but take
that same option with only, say,three weeks left.
Speaker 3 (05:06):
And that daily theta loss could be substantial.
It can feel like a real punchin the gut for a buyer if the
stock isn't moving their way.
Speaker 2 (05:12):
Right.
So the rate isn't constant.
It speeds up exponentially nearthe end.
Speaker 3 (05:17):
Exactly Heavily dependent on time remaining.
Speaker 2 (05:19):
OK, let's really step into the shoes of the option
buyer From their viewpoint.
Like you said, time is theenemy.
You buy a call or a put.
You pay that premium up front.
Speaker 3 (05:27):
And that premium, remember it's made up of any
intrinsic value, plus thatextrinsic value, the time value
and the implied volatility piece.
Speaker 2 (05:36):
And every single day TikTok, that extrinsic value is
shrinking because of theta, Evenif the stock price literally
goes nowhere.
Speaker 3 (05:45):
Right, let's use that example from the source.
Say you bought a call option$50, strike 30 days left.
Premium is $3.
And let's say its theta is 0.08.
Speaker 2 (05:54):
Okay, minus 8 cents.
Speaker 3 (05:56):
Which means you're losing $8 per contract per day
just because the calendar pageturned.
Speaker 2 (06:01):
Wow, so okay If the underlying stock just sits there
completely flat For a week,Seven days?
Speaker 3 (06:08):
You could look at your position and be down 56.7.
$8 a day times seven days,purely from time decay.
Nothing else changed, just timepassed.
You basically paid for time andthat time is running out.
Speaker 2 (06:18):
It really underscores that idea of being in a race
against the clock.
As a buyer, you don't just needthe stock to move your way, you
need it to move enough and fastenough to make up for that
daily theta bleed before theoption expires.
Speaker 3 (06:30):
Couldn't have said it better myself you need that
intrinsic value gain to outpacethe extrinsic value loss.
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Speaker 2 (07:16):
Okay, now let's completely flip that.
What about the option sellerFor them.
Time starts working for them,right?
Speaker 3 (07:22):
Exactly when you sell or write an option.
You collect that premium fromthe buyer right at the start.
That money is in your account.
And as time, marches on, thatoptions value decays because of
theta, that decaying value, thatloss for the buyer is
potentially your gain.
Speaker 2 (07:41):
You get to keep that decaying premium ideally, and
lots of common strategies arebuilt around this, like credit
spreads, iron condors.
Speaker 3 (07:46):
Yes, many income-focused or
premium-selling strategies likecredit spreads, iron condors
selling cash-secured puts, nakedputs.
They're explicitly designed toprofit from collecting premium
and letting Theta do its work.
Speaker 2 (07:59):
So let's take the opposite example.
You sell a, put $40 straight 30days out, you collect $2 in
premium and maybe its Theta isnegative 0.06.
Speaker 3 (08:07):
Okay.
So that negative 0.06, which isthe buyer's daily loss, for you
, the seller, it's effectivelyworking as a potential daily
gain.
It means the value of theoption you sold, the liability
you have, is expected todecrease by $6 per day.
Speaker 2 (08:20):
Which makes it cheaper to buy back later to
close the trade for a profit.
Speaker 3 (08:24):
Correct, or if the stock price stays above your $40
strike price right up untilexpiration, the option expires
worthless and you just keep theentire $200 premium you
initially collected.
Simple as that in the idealscenario.
Speaker 2 (08:37):
Of course there's the catch.
The seller takes on anobligation right, like being
forced to buy the stock at $40if that put gets assigned.
Speaker 3 (08:43):
Absolutely.
There's always risk, always anobligation on the seller side.
But if the stock behaves, staysabove $40 in this put example,
then Theta acts like a steadytailwind, pushing you towards
profitability day by day.
Speaker 2 (08:58):
Ok, Now, when people look at option chains on their
trading platform, they see Thetalisted there, usually as one of
the Greeks, and it's typicallyshown as a negative number.
Speaker 3 (09:08):
Yeah, that's the standard convention.
That negative sign reflectedthe buyer's perspective the
expected daily decrease in theoptions value.
Speaker 2 (09:15):
But if you're the seller, you just mentally flip
the sign.
Speaker 3 (09:18):
Pretty much.
You see, when it's a 0.06, youthink, ok, this position is
potentially gaining $6 in valuefor me today, just from time
passing.
Speaker 2 (09:24):
It's also interesting .
The sources mentioned thatoptions right at the money ATM
options tend to have the highesttheta values.
Speaker 3 (09:31):
That's generally true .
Atm options have the mostuncertainty about where they'll
finish, so they usually have thelargest chunk of pure time
value relative to their price.
Deep in the money or far out ofthe money options, they still
decay, but the amount of thetadecay per day might be lower
because less of their price ispure time premium.
Speaker 2 (09:51):
Makes sense.
And what about these multi-legstrategies the sources touched
on where you're buying oneoption and selling another
simultaneously, like a spread?
Speaker 3 (09:59):
Right.
In those cases, like a verticalspread or an iron condor, you
have both long options negativetheta and short options positive
theta in the same position.
Speaker 2 (10:09):
So you have to figure out the overall effect.
Speaker 3 (10:11):
Exactly what matters is the net theta of the entire
position.
You add up the thetas of allthe individual legs.
If the total is positive, theoverall position benefits from
time decay.
If it's negative, time decayhurts the overall position.
Speaker 2 (10:24):
Okay, so like a credit spread where you sell a
closer option and buy a furtherone, collecting a net credit?
Speaker 3 (10:29):
That's usually a positive net theta strategy.
It's short, premium overall.
You want time to pass.
That's why traders runningthese often prefer shorter
durations, maybe 30, 45 days out, to capture that faster theta
decay.
Speaker 2 (10:43):
And the opposite a debit spread where you buy the
closer option and sell thefurther one, paying a net debit.
Speaker 3 (10:49):
That typically has a negative net theta.
Your long premium overall timedecay is working against you, so
you need that underlying stockto make a directional move and
relatively quickly to overcomethe theta drag and become
profitable.
Speaker 2 (11:01):
Got it Okay.
Here's a common question andthe source has tackled it.
Does theta still work over theweekend when the markets are
closed?
Speaker 3 (11:09):
Ah, yes, the answer is absolutely yes.
Time doesn't stop just becausetrading halts on Friday
afternoon, saturday and Sundaystill pass.
Speaker 2 (11:17):
So that decay is still happening, even if we
can't see the price changing,correct.
Speaker 3 (11:21):
And the way it usually works is that brokers
and the options pricing modelsessentially account for those
two days of decay Saturday andSunday when they calculate the
theoretical values at the closeon Friday.
Speaker 2 (11:32):
Ah, so it gets kind of priced in on Friday.
Speaker 3 (11:34):
Yeah, you can think of it that way.
So if you're holding optionsover weekend, especially shorter
term ones, you should generallyexpect that two days worth of
theta decay has already happenedby the time the market opens on
Monday morning.
Speaker 2 (11:46):
Which means without a decent move in the stock price
over the weekend or right at theopen, the option value could be
noticeably lower Monday morningjust because of those two days
passing.
Speaker 3 (11:56):
Precisely that weekend.
Decay or theta crunch is a realthing to factor into your
thinking, particularly forbuyers of near-term options.
Speaker 2 (12:04):
Okay, Now, theta isn't the only game in town,
right?
The sources correctly highlightits interaction with implied
volatility 4.
Speaker 3 (12:12):
Definitely.
4 is the other huge factor inan option's extrinsic value.
It's the market's expectationof how much the underlying stock
might move in the future.
Speaker 2 (12:21):
And high theta means options are more expensive.
Low 4, cheaper.
Speaker 3 (12:25):
Generally yes.
High implied volatilityinflates option premiums because
there's a greater perceivedchance of a big price swing.
Low four deflates premiums.
Speaker 2 (12:34):
So how do IV and theta kind of dance together?
Speaker 3 (12:36):
Well, think about it.
If IV is really high, it cansometimes prop up an option's
price, even masking the effectof theta decay for a while.
The high expectation ofmovement keeps the premium
elevated, but that can reverse,oh, absolutely.
If IV then drops sharply, likeafter an earnings report comes
out and the uncertainty is gone,something called IV crush, that
(12:58):
drop in volatility can hit theoption price hard, on top of the
ongoing theta decay.
It's a double whammy for thebuyer.
Speaker 2 (13:05):
Which makes buying options when IV is already super
high potentially dangerous.
You pay a high price and youcould lose from both falling IV
and time decay.
Speaker 3 (13:13):
Exactly, it's often a tough headwind.
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Speaker 2 (13:53):
Conversely for sellers.
Speaker 3 (13:54):
Selling once IV is high seems like the attractive
scenario.
Speaker 2 (13:57):
It often is, you collect a much larger premium up
front because of that elevatedIV, then you potentially benefit
from two things working in yourfavor Theta decay ticking away
day by day and the possibilityof IV decreasing back towards
its average level, which alsolowers the options price,
helping your short position.
So understanding all this givesus ways to manage the risk
(14:18):
associated with theta.
What kind of strategies did thesources suggest?
Speaker 3 (14:22):
For buyers.
One key idea is consideringoptions with more time left,
longer term options, maybe LAPSwhich expire a year or more out.
Speaker 2 (14:32):
Because the daily theta hit is smaller way out in
time.
Speaker 3 (14:35):
Right.
The daily decay is much lesssignificant compared to buying a
weekly or monthly option.
It gives your trade thesis moretime to play out without
getting crushed by theta quiteso fast.
Speaker 2 (14:46):
And the sources also emphasize that buyers need to be
directionally right and fast.
Speaker 3 (14:50):
Yes, that speed element is crucial for buyers
because of theta.
You're racing the clock.
The longer you wait for themove, the more value theta
erodes.
Holding options right into thefinal days or week is often
discouraged, unless it's part ofa specific strategy, because
theta decay is just soaggressive.
Speaker 2 (15:06):
then OK, and for sellers?
What were the tips there?
Speaker 3 (15:09):
Sellers often look at that maybe 30 to 45 day
expiration window.
It's often seen as a kind ofsweet spot.
You still collect a decentamount of premium, but you also
start benefiting from thataccelerated theta decay we
talked about kicking in duringthe final month.
Speaker 2 (15:24):
But they also shouldn't hold too close to
expiration.
Speaker 3 (15:26):
Generally, yes.
The sources mention avoidingthe very final week or days due
to rising gamma risk.
We didn't dive deep into gammatoday, but basically option
prices get extremely sensitiveto small moves in the stock
price right at the very end.
It becomes much moreunpredictable, more volatile.
So many sellers prefer to closetheir positions before that
(15:47):
final riskiest period, even iftheta is technically highest,
then locking in profit andreducing risk.
Speaker 2 (15:54):
And sellers absolutely need to watch implied
volatility too.
Speaker 3 (15:57):
Oh, definitely If you sell an option collecting
premium and benefiting fromtheta, but then IV suddenly
spikes way up because ofunexpected news that rising IV
can inflate the options priceand quickly wipe out all the
gains you made from theta decayor even put you in a loss.
Managing 5E is key for sellers.
Speaker 2 (16:14):
OK, so let's try to wrap this up the key takeaways
from this deep dive based onyour sources.
Theta is time decay.
It hurts option buyers.
It helps option sellersgenerally speaking.
Speaker 3 (16:26):
And it's not linear.
It speeds up, acceleratesdramatically, especially in that
final month before expiration.
Speaker 2 (16:32):
It works every single day, weekends included, getting
priced in Right.
Speaker 3 (16:35):
And it doesn't operate alone.
It constantly interacts withimplied volatility, which can
amplify or dampen its effects.
Speaker 2 (16:42):
So Theta is just always there, always working
behind the scenes on everysingle option position.
Speaker 3 (16:48):
Always a constant factor.
Speaker 2 (16:49):
Which I think leaves us with a pretty provocative
thought to two on building onall this.
If time decay, Theta is thispersistent, measurable force
that is structurally workingagainst buyers and for sellers.
Does really internalizing thatshift, how you think about which
side of an options trade youmight want to be on really
internalizing that shift, howyou think about which side of an
options trade you might want tobe on, not just based on your
forecast for the stock'sdirection, but factoring in your
(17:10):
outlook on time and volatilityitself?
Speaker 3 (17:13):
It definitely should make you think.
It highlights a potential edge,or at least a persistent
tailwind that sellers canharness if they manage the
associated risks correctly.
It's a different way to framethe decision.
Speaker 2 (17:26):
Food for thought Well , thanks for digging into these
sources on to frame the decisionFood for thought Well, thanks
for digging into these sourceson Tata with us.
Really crucial concept.
This is an AI podcast based oneducational material from Option
Genius.
Visit us today atoptiongeniuscom.
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
We're digging into a topic today that you've shared
some great sources on, and it'swell.
It's a really powerful kind ofsilent force affecting anyone.
Trading options.
Speaker 3 (00:26):
Yeah, it really is.
The sources consistently pointto this idea of how options just
relentlessly lose value as timeticks by.
Speaker 2 (00:33):
Exactly, and that's the world of time, decay, or you
know the Greek term, theta.
It's one of those crucialfactors, maybe sometimes a bit
underestimated.
Speaker 3 (00:41):
Definitely underestimated.
Sometimes it massively impactswhether a trade works out or not
.
Speaker 2 (00:46):
So our goal here, our mission for this deep dive, is
to really unpack theta.
You know what is it, why doesit actually happen and,
crucially, what does it mean foryou when you're trading options
, whether you're buying them orselling them?
We're pulling insights straightfrom the material you sent over
.
Speaker 3 (01:01):
And understanding.
It is just fundamental, it'sthis constant downward pressure
on option prices.
Speaker 1 (01:07):
Yeah.
Speaker 3 (01:07):
You, really, you just can't ignore it.
It's working every single day.
The market's open even whenit's not.
Speaker 2 (01:12):
Okay, so let's start with the basics.
What is time decay?
Fundamentally.
Speaker 3 (01:16):
Well, think about it like this Every option contract.
It has an expiration date.
Right, that makes it what wecall a wasting asset.
A wasting asset Meaning itslifespan is limited.
As that expiration date getscloser, the option inherently
loses some value, just becausethere's less time left for
things to happen.
Speaker 2 (01:33):
And theta is how we actually measure that.
Speaker 3 (01:35):
Precisely, Theta is the Greek letter, the specific
number that tells you how muchan option's price, its premium,
is expected to drop per day justdue to time passing, assuming
you know nothing else changes,like the stock price or
volatility.
Speaker 2 (01:49):
OK, so the sources give an example.
If an option has a theta of,say, minus 0.05, minus 0.55,
what does that mean in realmoney terms?
Speaker 3 (01:58):
Right.
That 0.05 tells you that, allelse being equal, that specific
option contract is expected tolose $5 in value today $5
because one contract is 100shares.
Exactly.
You take that theta value nano0.05, multiply by 100.
So boom, $5 potentially gonefrom the options premium just
because a day went by.
Speaker 2 (02:17):
Wow, okay, that really clarifies it.
Five bucks a day, potentiallyjust vanishing.
And that immediately shows thecore dynamic, doesn't it?
Theta works against the optionbuyer.
Speaker 3 (02:28):
Absolutely against the buyer.
You paid a premium for thatoption and Theta is like this
constant little leak eroding thevalue of what you bought.
Speaker 2 (02:35):
It works for the option.
Seller.
Speaker 3 (02:37):
Correct.
The seller got paid thatpremium up front.
So as the option decays, as itsvalue drops because of time,
that decay works in the seller'sfavor.
They're essentially profitingpotentially from that time value
disappearing.
Speaker 2 (02:51):
Okay, that makes sense.
But why does time have thiseffect?
What's the engine driving thisdecay?
Speaker 3 (02:57):
Fundamentally it boils down to probability.
An option's value a big chunkof it anyway is based on the
chance that the underlying stockwill move enough before
expiration for the option to beprofitable or in the money.
Speaker 2 (03:10):
Right.
So more time means more chances.
Speaker 3 (03:13):
Exactly More time equals more opportunity for the
stock price to make a big move,either up or down.
The potential range of outcomesis wider.
But as that expiration datelooms closer, but as that
expiration date looms closer,that window of opportunity
shrinks.
The probability of asignificant move happening in,
say, the next five days is muchlower than over the next five
months.
Speaker 2 (03:32):
So the decreasing probability lowers the option's
value.
Speaker 3 (03:36):
Precisely that reduction in potential, in
probability gets reflected as alower option price and that
steady decrease is time decay,driven by theta.
Speaker 2 (03:46):
And this is especially true for options that
are out of the money right OTMoptions.
Speaker 3 (03:50):
Oh, absolutely OTM options.
They have zero intrinsic value.
Their price is purely extrinsicvalue, which is basically time
value plus implied volatility.
It's that time value componentthat's most vulnerable, the part
that really melts away day byday because of theta.
Okay, now here's something thesources component that's most
vulnerable, the part that reallymelts away day by day because
of theta.
Speaker 2 (04:06):
OK, now here's something the sources highlight.
That's really interesting,maybe a bit counterintuitive.
This decay, it doesn't happenevenly, does it?
It's not like a smooth,straight slide down.
Speaker 3 (04:14):
No, not at all, and that's a critical point to grasp
.
When an option has like sixmonths or a year left until it
expires, the theta value isusually pretty small.
The daily loss is almostnegligible sometimes compared to
the overall price.
Speaker 2 (04:27):
But that changes.
Speaker 3 (04:28):
Oh, it changes dramatically as you get closer
and closer to that expirationdate, the rate of decay actually
speeds up, it accelerates.
Speaker 2 (04:36):
And the source is really zeroed in on that last 30
days or so.
Speaker 3 (04:39):
Yes, that final month .
That's often called theacceleration phase.
Inside those 30 days, maybe 45,theta really kicks into high
gear.
Yeah, especially for at themoney and out of the money
options, the daily value lossbecomes much, much more
significant.
Speaker 2 (04:53):
Premiums can just evaporate very quickly so
thinking about that, an optionexpiring way out, maybe six
months from now, it might losejust pennies per day, but take
that same option with only, say,three weeks left.
Speaker 3 (05:06):
And that daily theta loss could be substantial.
It can feel like a real punchin the gut for a buyer if the
stock isn't moving their way.
Speaker 2 (05:12):
Right.
So the rate isn't constant.
It speeds up exponentially nearthe end.
Speaker 3 (05:17):
Exactly Heavily dependent on time remaining.
Speaker 2 (05:19):
OK, let's really step into the shoes of the option
buyer From their viewpoint.
Like you said, time is theenemy.
You buy a call or a put.
You pay that premium up front.
Speaker 3 (05:27):
And that premium, remember it's made up of any
intrinsic value, plus thatextrinsic value, the time value
and the implied volatility piece.
Speaker 2 (05:36):
And every single day TikTok, that extrinsic value is
shrinking because of theta, Evenif the stock price literally
goes nowhere.
Speaker 3 (05:45):
Right, let's use that example from the source.
Say you bought a call option$50, strike 30 days left.
Premium is $3.
And let's say its theta is 0.08.
Speaker 2 (05:54):
Okay, minus 8 cents.
Speaker 3 (05:56):
Which means you're losing $8 per contract per day
just because the calendar pageturned.
Speaker 2 (06:01):
Wow, so okay If the underlying stock just sits there
completely flat For a week,Seven days?
Speaker 3 (06:08):
You could look at your position and be down 56.7.
$8 a day times seven days,purely from time decay.
Nothing else changed, just timepassed.
You basically paid for time andthat time is running out.
Speaker 2 (06:18):
It really underscores that idea of being in a race
against the clock.
As a buyer, you don't just needthe stock to move your way, you
need it to move enough and fastenough to make up for that
daily theta bleed before theoption expires.
Speaker 3 (06:30):
Couldn't have said it better myself you need that
intrinsic value gain to outpacethe extrinsic value loss.
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Speaker 2 (07:16):
Okay, now let's completely flip that.
What about the option sellerFor them.
Time starts working for them,right?
Speaker 3 (07:22):
Exactly when you sell or write an option.
You collect that premium fromthe buyer right at the start.
That money is in your account.
And as time, marches on, thatoptions value decays because of
theta, that decaying value, thatloss for the buyer is
potentially your gain.
Speaker 2 (07:41):
You get to keep that decaying premium ideally, and
lots of common strategies arebuilt around this, like credit
spreads, iron condors.
Speaker 3 (07:46):
Yes, many income-focused or
premium-selling strategies likecredit spreads, iron condors
selling cash-secured puts, nakedputs.
They're explicitly designed toprofit from collecting premium
and letting Theta do its work.
Speaker 2 (07:59):
So let's take the opposite example.
You sell a, put $40 straight 30days out, you collect $2 in
premium and maybe its Theta isnegative 0.06.
Speaker 3 (08:07):
Okay.
So that negative 0.06, which isthe buyer's daily loss, for you
, the seller, it's effectivelyworking as a potential daily
gain.
It means the value of theoption you sold, the liability
you have, is expected todecrease by $6 per day.
Speaker 2 (08:20):
Which makes it cheaper to buy back later to
close the trade for a profit.
Speaker 3 (08:24):
Correct, or if the stock price stays above your $40
strike price right up untilexpiration, the option expires
worthless and you just keep theentire $200 premium you
initially collected.
Simple as that in the idealscenario.
Speaker 2 (08:37):
Of course there's the catch.
The seller takes on anobligation right, like being
forced to buy the stock at $40if that put gets assigned.
Speaker 3 (08:43):
Absolutely.
There's always risk, always anobligation on the seller side.
But if the stock behaves, staysabove $40 in this put example,
then Theta acts like a steadytailwind, pushing you towards
profitability day by day.
Speaker 2 (08:58):
Ok, Now, when people look at option chains on their
trading platform, they see Thetalisted there, usually as one of
the Greeks, and it's typicallyshown as a negative number.
Speaker 3 (09:08):
Yeah, that's the standard convention.
That negative sign reflectedthe buyer's perspective the
expected daily decrease in theoptions value.
Speaker 2 (09:15):
But if you're the seller, you just mentally flip
the sign.
Speaker 3 (09:18):
Pretty much.
You see, when it's a 0.06, youthink, ok, this position is
potentially gaining $6 in valuefor me today, just from time
passing.
Speaker 2 (09:24):
It's also interesting .
The sources mentioned thatoptions right at the money ATM
options tend to have the highesttheta values.
Speaker 3 (09:31):
That's generally true .
Atm options have the mostuncertainty about where they'll
finish, so they usually have thelargest chunk of pure time
value relative to their price.
Deep in the money or far out ofthe money options, they still
decay, but the amount of thetadecay per day might be lower
because less of their price ispure time premium.
Speaker 2 (09:51):
Makes sense.
And what about these multi-legstrategies the sources touched
on where you're buying oneoption and selling another
simultaneously, like a spread?
Speaker 3 (09:59):
Right.
In those cases, like a verticalspread or an iron condor, you
have both long options negativetheta and short options positive
theta in the same position.
Speaker 2 (10:09):
So you have to figure out the overall effect.
Speaker 3 (10:11):
Exactly what matters is the net theta of the entire
position.
You add up the thetas of allthe individual legs.
If the total is positive, theoverall position benefits from
time decay.
If it's negative, time decayhurts the overall position.
Speaker 2 (10:24):
Okay, so like a credit spread where you sell a
closer option and buy a furtherone, collecting a net credit?
Speaker 3 (10:29):
That's usually a positive net theta strategy.
It's short, premium overall.
You want time to pass.
That's why traders runningthese often prefer shorter
durations, maybe 30, 45 days out, to capture that faster theta
decay.
Speaker 2 (10:43):
And the opposite a debit spread where you buy the
closer option and sell thefurther one, paying a net debit.
Speaker 3 (10:49):
That typically has a negative net theta.
Your long premium overall timedecay is working against you, so
you need that underlying stockto make a directional move and
relatively quickly to overcomethe theta drag and become
profitable.
Speaker 2 (11:01):
Got it Okay.
Here's a common question andthe source has tackled it.
Does theta still work over theweekend when the markets are
closed?
Speaker 3 (11:09):
Ah, yes, the answer is absolutely yes.
Time doesn't stop just becausetrading halts on Friday
afternoon, saturday and Sundaystill pass.
Speaker 2 (11:17):
So that decay is still happening, even if we
can't see the price changing,correct.
Speaker 3 (11:21):
And the way it usually works is that brokers
and the options pricing modelsessentially account for those
two days of decay Saturday andSunday when they calculate the
theoretical values at the closeon Friday.
Speaker 2 (11:32):
Ah, so it gets kind of priced in on Friday.
Speaker 3 (11:34):
Yeah, you can think of it that way.
So if you're holding optionsover weekend, especially shorter
term ones, you should generallyexpect that two days worth of
theta decay has already happenedby the time the market opens on
Monday morning.
Speaker 2 (11:46):
Which means without a decent move in the stock price
over the weekend or right at theopen, the option value could be
noticeably lower Monday morningjust because of those two days
passing.
Speaker 3 (11:56):
Precisely that weekend.
Decay or theta crunch is a realthing to factor into your
thinking, particularly forbuyers of near-term options.
Speaker 2 (12:04):
Okay, Now, theta isn't the only game in town,
right?
The sources correctly highlightits interaction with implied
volatility 4.
Speaker 3 (12:12):
Definitely.
4 is the other huge factor inan option's extrinsic value.
It's the market's expectationof how much the underlying stock
might move in the future.
Speaker 2 (12:21):
And high theta means options are more expensive.
Low 4, cheaper.
Speaker 3 (12:25):
Generally yes.
High implied volatilityinflates option premiums because
there's a greater perceivedchance of a big price swing.
Low four deflates premiums.
Speaker 2 (12:34):
So how do IV and theta kind of dance together?
Speaker 3 (12:36):
Well, think about it.
If IV is really high, it cansometimes prop up an option's
price, even masking the effectof theta decay for a while.
The high expectation ofmovement keeps the premium
elevated, but that can reverse,oh, absolutely.
If IV then drops sharply, likeafter an earnings report comes
out and the uncertainty is gone,something called IV crush, that
(12:58):
drop in volatility can hit theoption price hard, on top of the
ongoing theta decay.
It's a double whammy for thebuyer.
Speaker 2 (13:05):
Which makes buying options when IV is already super
high potentially dangerous.
You pay a high price and youcould lose from both falling IV
and time decay.
Speaker 3 (13:13):
Exactly, it's often a tough headwind.
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Speaker 2 (13:53):
Conversely for sellers.
Speaker 3 (13:54):
Selling once IV is high seems like the attractive
scenario.
Speaker 2 (13:57):
It often is, you collect a much larger premium up
front because of that elevatedIV, then you potentially benefit
from two things working in yourfavor Theta decay ticking away
day by day and the possibilityof IV decreasing back towards
its average level, which alsolowers the options price,
helping your short position.
So understanding all this givesus ways to manage the risk
(14:18):
associated with theta.
What kind of strategies did thesources suggest?
Speaker 3 (14:22):
For buyers.
One key idea is consideringoptions with more time left,
longer term options, maybe LAPSwhich expire a year or more out.
Speaker 2 (14:32):
Because the daily theta hit is smaller way out in
time.
Speaker 3 (14:35):
Right.
The daily decay is much lesssignificant compared to buying a
weekly or monthly option.
It gives your trade thesis moretime to play out without
getting crushed by theta quiteso fast.
Speaker 2 (14:46):
And the sources also emphasize that buyers need to be
directionally right and fast.
Speaker 3 (14:50):
Yes, that speed element is crucial for buyers
because of theta.
You're racing the clock.
The longer you wait for themove, the more value theta
erodes.
Holding options right into thefinal days or week is often
discouraged, unless it's part ofa specific strategy, because
theta decay is just soaggressive.
Speaker 2 (15:06):
then OK, and for sellers?
What were the tips there?
Speaker 3 (15:09):
Sellers often look at that maybe 30 to 45 day
expiration window.
It's often seen as a kind ofsweet spot.
You still collect a decentamount of premium, but you also
start benefiting from thataccelerated theta decay we
talked about kicking in duringthe final month.
Speaker 2 (15:24):
But they also shouldn't hold too close to
expiration.
Speaker 3 (15:26):
Generally, yes.
The sources mention avoidingthe very final week or days due
to rising gamma risk.
We didn't dive deep into gammatoday, but basically option
prices get extremely sensitiveto small moves in the stock
price right at the very end.
It becomes much moreunpredictable, more volatile.
So many sellers prefer to closetheir positions before that
(15:47):
final riskiest period, even iftheta is technically highest,
then locking in profit andreducing risk.
Speaker 2 (15:54):
And sellers absolutely need to watch implied
volatility too.
Speaker 3 (15:57):
Oh, definitely If you sell an option collecting
premium and benefiting fromtheta, but then IV suddenly
spikes way up because ofunexpected news that rising IV
can inflate the options priceand quickly wipe out all the
gains you made from theta decayor even put you in a loss.
Managing 5E is key for sellers.
Speaker 2 (16:14):
OK, so let's try to wrap this up the key takeaways
from this deep dive based onyour sources.
Theta is time decay.
It hurts option buyers.
It helps option sellersgenerally speaking.
Speaker 3 (16:26):
And it's not linear.
It speeds up, acceleratesdramatically, especially in that
final month before expiration.
Speaker 2 (16:32):
It works every single day, weekends included, getting
priced in Right.
Speaker 3 (16:35):
And it doesn't operate alone.
It constantly interacts withimplied volatility, which can
amplify or dampen its effects.
Speaker 2 (16:42):
So Theta is just always there, always working
behind the scenes on everysingle option position.
Speaker 3 (16:48):
Always a constant factor.
Speaker 2 (16:49):
Which I think leaves us with a pretty provocative
thought to two on building onall this.
If time decay, Theta is thispersistent, measurable force
that is structurally workingagainst buyers and for sellers.
Does really internalizing thatshift, how you think about which
side of an options trade youmight want to be on really
internalizing that shift, howyou think about which side of an
options trade you might want tobe on, not just based on your
forecast for the stock'sdirection, but factoring in your
(17:10):
outlook on time and volatilityitself?
Speaker 3 (17:13):
It definitely should make you think.
It highlights a potential edge,or at least a persistent
tailwind that sellers canharness if they manage the
associated risks correctly.
It's a different way to framethe decision.
Speaker 2 (17:26):
Food for thought Well , thanks for digging into these
sources on to frame the decisionFood for thought Well, thanks
for digging into these sourceson Tata with us.
Really crucial concept.
This is an AI podcast based oneducational material from Option
Genius.
Visit us today atoptiongeniuscom.
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