Option Theta Explained (Best Guide) | Option Greeks for Beginners

Option theta represents an option's expected price decay with each passing day. Theta decay is an extremely important concept to understand as an options trader.

As an option buyer or seller, you need to understand how an option's price is expected to change over time. One of the option Greeks, theta, tells us how an option's price is expected to decrease over time.

In this video, you'll learn:

1. What an option's theta represents

2. Why option prices decrease over time

3. Which options have the most exposure to time decay

4. How at-the-money option decay becomes more significant as expiration approaches

5. How in-the-money and out-of-the-money option decay becomes less significant as expiration approaches. tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.

[stockoptionsprophet]

👍You and Mike are the TRUE Options Gods!👍☺

[jessemartinez]

You did an excellent job explaining Theta. I viewed several videos but none explaining Theta in the detail as you did. Thank you.

[erikung]

Thank you for your time and effort! Helped explain and clarify sticking points

[Smokez]

Only recently discovered you, better late than never! These videos are great, clearly explained with graphs and studies. Keep doing what your doing and the subscribers will come!

[SteveJobs_]

With ATM in general, as expiration gets closer, Theta's absolute value is increasing. It means Theta is decreasing with the minus mark?

[highdesert]

Theta Value is affected by time, implied volatility, stock value, And strike price to name a few. It is not just affected by time alone.

[giG_apP_haCks_]

"Theta" is time decay. This is the first derivative of the option contract's price with respect to time. IMHO, "theta decay" is a misnomer. "Theta decay" is the first derivative of time decay, right? (2nd derivative of option price vs. time) Theta is not constant, so studying "theta decay" could be beneficial. However, this is something never discuss. We have gamma, though. This is the second derivative of the option price with respect to the underlying's price. Gamma is the first derivative of delta with respect to the underlying's price.

[mikolajn]

Hi, loved the video, your doing some amazing work! I have only one question, what software did you use to gather and process the data in the ATM and OTM extrinsic value decay study? Thanks!

[rohitindurkar]

Thank you for sharing knowledge. Keep it up.

[rkodjo]

Your videos showing the TASTYWORKS platform are reduced and too tiny to be seen. Why can't you make the platform demos a more normal size? ZOOM in.

[cmergeee]

the irony of watching this 2 years later and seeing $TSLA over $800 lol. good video anyways