Been trading for a while now but still struggling with theta and how it affects my options.
I know it has something to do with time but not sure exactly how it works. Keep seeing my positions lose value even when the price moves in my direction.
Is this what time decay means? How do you deal with this when planning trades?
Theta is a key part of trading options. It represents the daily loss in value due to time decay. Even with favorable stock movement, theta can diminish your profits if the price shift isn’t significant. Think of theta as the cost of holding your position. The closer you get to expiration, the more that cost increases. Many traders make the mistake of buying short-term options and then wonder why they lose money despite the stock moving in their favor. I recommend avoiding options with less than 30 days to expiration unless you’re confident in a strong price move.
Lost $800 on Tesla options last month because I ignored theta completely. Bought calls with only 5 days left thinking the earnings run would save me.
The stock moved up 2% but my options still dropped 40%. That pain taught me to never buy options with less than 2 weeks unless I expect massive movement.
Now I check theta before every trade and it changed everything.
Theta hits harder on weekends too since it counts non-trading days.
Theta is a measure of how much an option loses value each day due to time passing. It acts like a countdown timer that decreases the option’s price.
For instance, if theta is -0.50, the option will lose about 50 cents each day, even if the stock price doesn’t change. This loss accelerates as expiration nears.
Time decay becomes more significant in the last weeks before expiry. Therefore, buying options close to expiration is risky unless there is a strong expectation for rapid movement.
Time decay accelerates exponentially. Options lose 30% of time value in final 30 days, 50% in final 10 days.
• Buy options with 45+ days to expiration
• Sell 30-45 days out to capture maximum decay
• Avoid weekend holds on short-term positions
Data shows theta doubles weekly near expiration.