Options are wasting assets. But the way they decay is not linear.
We have already introduced Theta - the Greek that measures how much an option's value declines each day, all else equal.
Today we dig deeper into how Theta behaves over time, and why the decay curve matters for every options trader.
What Is Theta
Theta measures how much an option's premium decreases per day, assuming no changes in price or volatility.
- Long options have negative Theta
- Short options have positive Theta
Every day that passes without a move eats away at the value of long options, and benefits short positions.
The Time Decay Curve
Theta is not constant.
- Far from expiry, Theta decay is slow and steady
- As expiry approaches, Theta accelerates rapidly
- In the final week or days, Theta can eat away most of the remaining premium very quickly
This creates a curve where time decay is slow at first, then speeds up dramatically.
Understanding this curve is crucial for timing your entries and exits.
Key Characteristics of Theta Decay
- At-the-money options decay fastest near expiry
- Out-of-the-money options can lose value even faster as expiry nears
- Deep in-the-money options experience slower decay because most of their value is intrinsic
Short-dated, at-the-money options are the most sensitive to time decay.
Why This Matters
- If you are buying options, you want to avoid getting stuck in the steep part of the decay curve without price movement
- If you are selling options, you want to sell into areas where Theta decay works quickly in your favor
Your position's lifespan should match your trade thesis.
If you expect a fast move, shorter expiries can work.
If you need more time, longer expiries give you more room but with slower decay.
On Derive
- Theta is visible per option and across your portfolio
- You can filter options by days to expiry
- You can use subaccounts to separate short-term and long-term Theta exposure
Derive gives you full transparency into how time decay is affecting your trades.
Your Action Today
- Open the Derive options chain
- Compare Theta values for near-dated and longer-dated options
- Notice how Theta increases dramatically for options within one week of expiry
- Think about how you would adjust strategies based on where you are on the decay curve
Tomorrow, we will shift to combining Greeks into full trade analysis, starting with basic Greeks interpretation.
Coming tomorrow:
Day 20 – How to Read Greeks Together: Building a Full Trade Profile
Hasta manana
Cpt
CptRandlelwa
