Definition
Theta is the options Greek that measures time decay — the rate at which an option's extrinsic (time) value decreases each day as expiration approaches, all else equal — it represents a constant headwind for option buyers and a constant tailwind for option sellers.
Example
“I bought a 30-day call for $2.80 with theta of -$0.04. That means every day I hold this option, it loses $4 in value just from time passing — even if the stock doesn't move at all. That's the cost of owning time.”
Detailed Explanation
Theta is the silent P&L killer for option buyers who hold too long. While you're focused on whether the stock is going in your direction, theta is quietly eroding the extrinsic value of your option every single day — including weekends and holidays (theta doesn't stop for the market being closed; it's calculated and applied continuously). For at-the-money options with 30 days to expiration, theta might be $0.03–0.05 per day. For 0DTE (same-day expiration) options, theta accelerates dramatically as the day progresses and can be several times higher. This is why 0DTE options bought early in the day can become nearly worthless by close even on a flatly-trading stock.
The relationship between theta and time isn't linear — it's curved. Options lose time value slowly when they're far from expiration and accelerate their decay as expiration approaches. The last 30 days of an option's life see dramatically faster theta decay than the first 30 days. This is captured in the "theta decay curve" that every options trader should understand: if you buy a 90-day option for $3.00, it might only lose $0.50 of that premium in the first 30 days (one-third of the time, one-sixth of the premium), but accelerate to losing $1.50 in the final 30 days. Buying options with time to spare (60–90+ days) reduces this acceleration effect.
Option sellers use theta to their advantage by collecting premium and watching it decay. A credit spread, iron condor, or naked option sale is essentially a bet that time will pass and the stock won't move enough to hurt you before expiration. The risk for sellers is gamma risk — especially near expiration, a large move can overwhelm the theta they've collected. The classic options strategy framework: buy options when IV is low and you expect a large move (pay cheap premium, gamma benefits you on the move), sell options when IV is high and you expect calm conditions (collect expensive premium, theta benefits you as time passes and IV reverts).