Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 9

Sand in the Hourglass: Volatility and Option Theta

Theta, otherwise known as time decay, is an approximation that measures how quickly time value disappears from an option with the passing of one day without movement in either the underlying asset or implied volatility. Specifically, theta is used to approximate how much an option’s extrinsic value is carved away by the passage of time. The theta for a call and put at the same strike price and the same time to expiration is generally similar but not exactly equal.

The difference in theta between calls and puts solely depends on the individual stock’s cost of carry. Thus, an underlying asset without a dividend or a dividend yield that is implied (i.e., stock index future) will have call ...