Time decay (theta)
Definition · Level 2 · Long options & hedges
Keep reading with Tradecraft
You’ve read your 3 free definitions this month. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
The daily erosion of an option's time value as expiry approaches, all else equal: a cost to buyers, income for sellers. For near-the-money options it accelerates in the final weeks; far OTM options lose most of theirs earlier.
Example
Theta −0.05 on 20 long calls = −$100 a day.
Where Tradecraft teaches it
Level 2 · Long options & hedges, in the lesson “Choosing strikes, expiries and fighting theta”: Pick the strike for the size of the move and the expiry for its timing — then respect time decay.
Related terms
- Lotto ticketDesk slang for a cheap, far out-of-the-money option bought for a small chance at a huge payoff; it usually expires worthless.
- ArbitrageLocking in a profit, riskless in principle, from a price discrepancy by simultaneously buying the cheap side and selling the rich side of equivalent…
- Borrow feeThe annualized fee a short seller pays to borrow shares (and a lender earns); large on hard-to-borrow names.
- CollarOwn the stock, buy a put below and sell a call above.
- ConversionLong stock + long put + short call, same strike and expiry.
- Cost of carryNet cost of holding a position over time: financing on the money tied up, plus storage or borrow fees where they apply, minus income such as…