Options & Derivatives

Theta

Also known as: Time Decay

The rate at which an option loses value as time passes, holding everything else constant.

Negative for long options - the rent you pay for owning gamma and vega.

Accelerates near expiry for at-the-money options, because most of their remaining value is time value and it must reach zero at expiry. Out-of-the-money options decay more steadily and are near-worthless well before expiry, so the famous decay curve is an at-the-money phenomenon rather than a universal one.

The framing to use: theta and gamma are two sides of one trade. You are paid theta for being short movement, or you pay it for being long movement.

Full guide

Vega and Theta

Sensitivity to volatility and to the passage of time - the two Greeks that decide whether owning options pays.

Related terms

Practise this

Put it into practice

Knowing the definition is not the same as spotting where it applies under time pressure. Work the question bank free.

Start practising free

Browse the full quant interview glossary