Copyright © 2016 – 2025 Food for Theta, LLC. All rights reserved.
The Food for Theta brand and all content on the Food for Theta website are copyrighted materials and may not be reproduced or redistributed for profit without written consent from the owner.
back
how the gears turn
Pricing Options: Time
How the passage of time affects option prices
Theta's Got Moves
Unsurprisingly, theta is not a static number. It lives and breathes as market conditions change. Anything that affects the perception of risk can also affect an option's rate of decay. the number of days to expiration (DTE), and are three particularly important factors that contribute to theta decay rates.
Theta & Moneyness
options carry the most uncertainty and, as a result, generally have the highest theta levels. As an option moves farther or deeper theta rates will typically decrease. This is because options at the outer bounds of the expected move have greater certainty regarding their moneyness at expiration.
Theta & Days to Expiration
As expiration draws near, theta rates will accelerate. Extrinsic value will decay at increasingly faster rates as an option gets closer to expiration. Some traders try to take advantage of this rapid decay by selling options very close to expiration. The risk of doing this is that options also become far more sensitive to changes in share price near expiration. This can result in wild swings in daily
Theta & Expected Move
With a greater expected move comes greater risk and greater theta levels. As we learned in a previous article, is primarily derived from three driving forces: DTE, and share price. As implied volatility increases, so too can an option's theta levels. In addition, trading higher priced will also typically result in higher theta levels.