Time is money – and nowhere is that truer than in options trading. Hence, we need to understand theta – or time decay.
I sat down with Mat Cashman, the Principal of Investor Education at the Options Industry Council (OIC), to understand theta and how time changes the value of options. Theta is one of the most important options greeks – and I dare say you cannot be a successful options trader without understanding theta.
Watch the interview about theta
The video was produced with Streamyard – an easy-to-use and amazing tool for live streaming and recording.
Mat Cashman
Mat Cashman has more than 20 years of experience in the options industry. He started his career on the trading floor of the Chicago Board of Options Exchange in 2000 and has since traded multiple asset classes across a wide array of exchanges, including the CME, CBOT, and the Eurex Exchange. Today he works for the Options Industry Council, which is part of the largest options clearing house in the world, Options Clearing Corporation.
What is theta in options trading?
Theta is one of the key “Greeks” in options trading, representing the rate at which an option’s value declines as it approaches expiration. Often called “time decay,” Theta is a critical factor for both buyers and sellers. For sellers, it can be a powerful profit engine. For buyers, it’s a hidden cost that can erode returns.
More formally, theta expresses the time decay of an option over 24 hours, assuming all other pricing factors are constant. It is measured per calendar day, not per trading day.
Key insights from the video
Here are some of Mat’s core messages in the video:
1. Theta is always working – for or against you
Matt explains that every option decays at its theta rate, whether you’re buying or selling. Even if you’re trading directionally, theta is still affecting your position.
2. Theta is not linear
Theta decay isn’t linear—it accelerates as expiration approaches. Mat explains how this exponential curve impacts at-the-money and out-of-the-money options differently, offering actionable insights for traders.
3. Theta benefits sellers
Theta is a friend to sellers and a foe to buyers.
With all other factors constant, the time decay will allow the seller to buy back his/her position for a lower price than it was sold for. The buyer, on the other hand, will see the value of his position erode.
Mat explains how to position your trades to either harness or mitigate theta’s effects, depending on your strategy.
4. Volatility impacts theta
Theta isn’t independent—it’s affected by implied volatility. When volatility rises, theta increases because options hold more extrinsic value. When volatility drops, theta decreases, reducing decay speed.
5. The 0DTE theta trap
Many retail traders are drawn to 0DTE trading, believing theta will always work in their favor. But Matt warns that high Theta also comes with high gamma, making these trades riskier than they appear.
6. Theta is not guaranteed income
Mat emphasizes that while Theta decay can work in your favor as a seller, it’s not a guaranteed profit. Theta is a function of risk, and understanding its nuances is essential to avoiding costly mistakes.
Where to learn more
Options Industry Council offers comprehensive information about the different options greeks, options trading concepts and strategies for different markets.
