HOLLOW POINT TRADING
What is Theta?
Theta measures the rate at which an option loses value as time passes, all else being equal. It's expressed as a negative number for long options because time decay works against the buyer.
A theta of -0.05 means the option loses $5 per contract per day (assuming no movement in the underlying). Theta is sometimes called "time decay" and is the only Greek that is 100% predictable—time marches forward regardless of what the market does.
How Theta Works
Non-Linear Decay
Theta decay is not constant. It accelerates as expiration approaches. An option with 60 days to expiration loses value slowly. The same option with 10 days left loses value rapidly. The final week sees the most dramatic decay.
ATM vs. OTM Theta
At-the-money options have the highest theta because they have the most extrinsic value to lose. Deep ITM options have mostly intrinsic value and less theta. OTM options have low absolute theta but high theta relative to their price.
⚠️ OTM Warning
A $0.50 OTM option losing $0.05/day is losing 10% of its value daily—a brutal rate!
Theta by Position Type
| Position | Theta Effect | Time Works... |
|---|---|---|
| Long Calls/Puts | Negative theta | Against you |
| Short Calls/Puts | Positive theta | For you |
| Debit Spreads | Typically negative | Against you |
| Credit Spreads | Typically positive | For you |
| Stock/Futures | Zero theta | No effect |
Theta Decay Curve
Options lose value slowly at first, then rapidly in the final 30 days:
| Days to Expiration | Decay Speed | Strategy Implication |
|---|---|---|
| 60+ DTE | Slow | Good for buyers |
| 30-60 DTE | Moderate | Sweet spot for sellers |
| 14-30 DTE | Fast | Close or roll positions |
| 0-14 DTE | Very Fast | High risk for all |
Trading Strategies
🎯 Using Theta to Your Advantage
- For Buyers: Buy more time than you need (45+ DTE) to reduce daily bleed
- For Sellers: Sell 30-45 DTE for optimal theta/risk balance
- Taking Profits: Close winners at 50% profit - remaining decay slows
- Weekend Theta: Theta ticks every calendar day including weekends
- Calendar Spreads: Profit from the difference in decay rates between expirations
Theta and Implied Volatility
Higher implied volatility means higher option prices—and higher theta. When IV is elevated, options have more extrinsic value to lose. This is why selling options into high IV environments is popular: you collect more premium AND benefit from faster decay if IV drops.
⚠️ IV Crush Warning
After events like earnings, IV drops rapidly (IV crush). This can cause bigger losses for long options than theta alone. If you're buying options into events, the underlying needs to move MORE than the IV crush and theta combined.
Time is Either Your Friend or Enemy
Every day the market is open, theta is working. For buyers, it's a constant headwind that erodes position value. For sellers, it's a tailwind that generates profits even when the market doesn't move.
Choose your side wisely—and structure trades to have time work for you, not against you.