Theta (option).

In plain English

Theta measures time decay, the steady loss in an option's extrinsic value as the days run out, and it is usually shown as a negative number per day. Only the extrinsic part of the price decays; intrinsic value, the amount an option is already in the money by, does not. Decay is not even across the calendar. It speeds up as expiration nears, and it is fastest for options struck near the current price. A buyer pays theta every day the position is held, while a seller collects it.

01Why it matters

Time decay is the reason an option buyer can be right about direction and still lose money, because the move has to arrive before the clock runs out.

02The math, step by step

An option costs 3.00 with a theta of 0.05. Hold it ten days with the stock unchanged and roughly 0.50 of value is gone, leaving about 2.50, or 250 per contract instead of 300. Nothing about the stock changed. Only the calendar did.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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