Theta

Theta is a number that tells you how much value an option is expected to lose each day, simply because time is passing, assuming nothing else about the market changes. It is one of a family of risk measures called "the Greeks," which describe how an option's price reacts to different factors — theta's job is to isolate the effect of time.

An option is a contract that gives the right to buy or sell a stock at a set price by a certain date. Part of its price is "time value" — the extra amount buyers pay for the possibility that the stock will move favorably before expiration. Every day that passes, there is less time left for that move to happen, so this time value shrinks. Theta quantifies that daily shrinkage, usually expressed as a negative number for option buyers, like -0.05, meaning the option loses about 5 cents in value per day if the stock price and other conditions hold steady.

The nuance that trips people up is that theta decay is not a straight, even line. It accelerates as expiration gets closer, so an option might lose very little value per day when there are two months left, then lose noticeably more per day in its final week. Theta is also not fixed; it changes as the stock price moves, as volatility shifts, and simply as time itself passes, so the theta you see quoted right now is only an estimate for the next day, not a guarantee for the rest of the option's life.

It also matters which side of the trade you're on. Buying an option means theta is generally working against you, quietly eroding value while you hold it. Selling an option means theta is generally working in your favor, since the erosion is money the buyer is losing and the seller is effectively collecting, though selling options carries its own distinct risks.