An easy guide to Theta in options with examples

When you’re making an option play on your brokerage account, have you ever noticed the bottom right stat called Theta?

Why does Theta sound like a frat terminology, and why is the number always negative?

It turns out, Theta is an extremely important stat to look at when buying option contracts. The term used when fighting against time. And the number that Theta is given is the loss of value of the contract as the expiration date gets closer.

What is Theta in options?

Theta is the rate at which an option contract declines in value.

Options contracts have an expiration date on which they must be exercised on or before the contract expires. For that reason Theta will always represented as a negative number.

This continuous time decay will slowly chip away at the market value of an options contract until it’s exercised or it expires. This is a good thing for the seller or the option, but bad for the buyer.

A Theta option example

Let’s do a simple example of making an option contract purchase and calculating the Theta total value.

Let’s say I purchase a call option for $SPY with a strike price of $180 with a bid of $1.71 expiring in 3 days, and a Theta of -0.2759.

Remember, each contract is 100 shares. So my total contract price is $171.

Calculating the value of Theta of an option contract

Theta represents a dollar value per share. That means in the example above that number means -0.27¢.

Since each contract holds 100 shares, the Theta value has to be multiplied by 100; equalling out to be -$27.50.

This means that for each day that gets closer to my contract expiration date, my contract will lose an approximate $27.50 in total value until the contract expires.

How to find Theta of an option

Here’s an example of where you can scout the Theta value on the Webull desktop application.

The Webull desktop client displays Theta values on the right side of the options chain screen as shown above. While on the iOS mobile app it displayed on the options chain at the very far right as shown below.

How to fight against Theta

After reading all that you might be wondering how to try and counter theta?

Well the only real way to do so is buying options contracts with a long expiration date. We’re talking weeks or months ahead of time. Theta will always be present but its effects will be a lot less severe than for example a same week or same day contract.

The downside to this is that a longer contract often commands a much larger premium price since more time on a contract works against the contract seller. Unfortunately there is no such thing as a free lunch.