# Theta

**Theta is the option seller's best friend.**

**Just by her presence, she adds to your profit day by day, hour by hour. **

**However, for the option buyer, theta is the enemy, trying to steal your profit piece by piece.**

Theta in options trading represents the rate of decline in the value of an option with the passage of time. We also call this the option's time decay. Usually this is expressed as a positive number for short positions and a negative number for long positions. More specifically, Theta tells how much an option falls in value with the passage of one day, assuming all other factors remain constant.

For instance, if an option has a Theta of -0.05, it means the option’s price will drop by $0.05 per day, all else being equal. This decay accelerates as the expiration date approaches, making Theta an essential consideration for traders holding options positions.

## Beneficial for option sellers

The time decay is beneficial for the option sellers, as it means they can buy back the option for a lower price than they sold it for, and thus realizing a profit. For an option buyer, the effect is the opposite.

## Theta as the extrinsic value

**Another way to look at theta is as the extrinsic value of an option **

Let's say the current price of company XYZ is 100 dollars. You own a call option with the strike price of 98 dollars and the option is currently priced in the market at 5 dollars. This option will have an intrinsic value of 2 dollars and and extrinsic value of 3 dollars.

The intrinsic value shows how much the option is in the money. If nothing else changes from now until the option expires, you will at expiration have the right to buy the shares for 98 dollars and can immediately sell them in the market for 100 dollars, thus profiting 2 dollars.

However, the extrinsic value of 3 dollars will disappear with time and become zero at expiration.

## Theta is non-linear

It is important to be aware the theta decay is non-linear and accelerates with time. The more days there is to expiration, the slower is the theta decay. The biggest theta decay is with options expiring the same day, so-called 0DTE options.