Theta Decay Calculator

Theta measures the rate at which an option loses value due to the passage of time, commonly known as "time decay." This calculator helps you understand how quickly your options will lose value as they approach expiration.

When to use this calculator:

  • When planning option selling strategies that benefit from time decay
  • When evaluating the cost of holding long options positions
  • When determining optimal timing for entering or exiting options positions
  • When comparing time decay rates across different expiration dates
  • When assessing how quickly premium will erode during weekends and holidays

Theta Decay Analysis

Calculate time decay metrics

Understanding Theta

Theta (Θ) Basics

Theta represents the expected change in an option's price for a one-day decrease in time to expiration, all else being equal.

  • • Usually negative: For both long calls and long puts
  • • Expressed as: Dollar amount per day (e.g., -$0.05 per day)
  • • Increases in magnitude: As expiration approaches (accelerates in the final weeks)
  • • Highest for: At-the-money options near expiration

Key concept: Time decay is the enemy of option buyers and the ally of option sellers. Long options lose time value every day, while short options benefit from this decay.

Time Value vs. Intrinsic Value

Understanding how theta affects different components of option value:

  • • Intrinsic value: The amount an option is in-the-money (not affected by theta)
  • • Time value: The premium above intrinsic value (eroded by theta)
  • • At expiration: All time value disappears, leaving only intrinsic value
  • • Out-of-the-money options: Consist entirely of time value, making them especially vulnerable to theta decay

Example: An option with $2.50 of time value and theta of -$0.10 will lose approximately $0.10 in value each day due solely to time passage.

Calculator Fields Explained

  • Stock Price:

    The current market price of the underlying asset.

  • Strike Price:

    The price at which the option can be exercised.

  • Days to Expiry:

    Number of calendar days until the option expires.

  • Volatility:

    The expected annual volatility of the underlying asset (in %).

  • Interest Rate:

    Risk-free interest rate used in the Black-Scholes model.

  • Option Type:

    Call (right to buy) or Put (right to sell).

Results Explained

Time Decay Metrics

  • Daily Theta:

    The expected option price decrease in one calendar day. Calculated as Theta ÷ 365.

  • Weekly Theta:

    The expected option price decrease over one week. Calculated as Theta ÷ 52.

  • Monthly Theta:

    The expected option price decrease over one month. Calculated as Theta ÷ 12.

Practical Metrics

  • Daily Theta %:

    Daily theta as a percentage of the position value. Shows how much of your investment erodes each day due to time decay.

  • Other Greeks:

    Delta, gamma, vega, and rho are also displayed to provide a complete understanding of the option's behavior.

Factors Affecting Theta

  • Time to Expiration: Theta accelerates as expiration approaches, especially in the final 30-45 days
  • Strike Price (Moneyness): At-the-money options have the highest theta in absolute terms
  • Volatility: Higher implied volatility typically increases theta (more time value to decay)
  • Interest Rates: Higher rates slightly increase call theta and decrease put theta
  • Dividends: Expected dividends can affect theta for options on dividend-paying stocks
  • Weekends/Holidays: Time decay occurs over calendar days, including non-trading days

Theta Curves Over Time

How theta behaves as expiration approaches:

  • Far from expiration: Theta is relatively small and consistent (linear decay)
  • 30-45 days to expiration: Theta begins to accelerate, especially for ATM options
  • Final week: Theta reaches maximum levels (exponential decay)
  • Day of expiration: All remaining time value rapidly decays to zero

Theta by Moneyness

How strike price affects theta:

  • Deep ITM: Low theta (minimal time value to decay)
  • ATM: Highest absolute theta (maximum time value)
  • OTM: Moderate theta that decreases as option moves further OTM
  • Deep OTM: Very low theta (minimal premium/time value to decay)

Trading Strategies Leveraging Theta

Credit Spreads

Selling higher-theta options and buying lower-theta options for protection.

Example: Bull put spreads and bear call spreads that benefit from time decay while limiting risk.

Iron Condors

Multi-leg strategy that profits from time decay in range-bound markets.

Example: Selling OTM puts and calls while buying further OTM options for protection.

Calendar Spreads

Exploiting differential theta between near and far-dated options.

Example: Selling near-term options with higher theta while buying longer-term options with lower theta.

Risk Management When Trading Theta

  • Recognize that theta decay is not linear and accelerates dramatically near expiration
  • Remember that theta is just one of many factors affecting option prices
  • Be aware that large price movements (gamma risk) can quickly overwhelm theta benefits for short option positions
  • Consider that high-theta strategies often have low probability of maximum profit
  • Account for weekends when planning entries and exits around theta decay

Practical Tips for Theta-Based Trading

  • For long options positions, consider buying extra time to minimize the impact of theta
  • For short options positions, target the 30-45 DTE window for optimal theta decay
  • Monitor theta/delta ratio to evaluate the time decay relative to directional exposure
  • Consider closing short options positions at 50-75% of maximum profit to avoid gamma risk near expiration
  • Remember that options lose time value over weekends, making Friday an expensive day to buy options and a good day to be short options
  • Avoid selling options before high-volatility events when the premium may reflect event risk more than time value