# Calculating an Option's Theta

In order to find the options theta of an option, you need to take the derivative of an options value by time first. This will always be a negative number, but you will need to use the absolute value. An options theta is the daily rate of depreciation of a stock option price, while setting underlying stock at a constant price. An options theta measures how much an options price will decrease over time. This is the time decay rate.

As the expiration date of an option comes closer, the option’s  extrinsic value, decreases.  The value of an option with a theta of -0.015 will depreciate by \$0.015 every day, including weekends and holidays.

The Value of the Option

Time decay benefits writers of options at the expense of buyers. Long call and long put options both have negative thetas, which diminish the value of the options. Theta is calculated in the same way for both puts and calls.

The options theta does not stay the same throughout the life of an option. Thetas increase as the expiration date comes closer, and decreases as they go farther in the money, or out of the money. Thetas increase very rapidly during the final days before expiration. Thus, traders try to  avoid trading options in the last days before expiration if possible.

If an option expires out of the money, it will then be completely worthless. If it expires in the money, most brokerage houses will automatically  exercise that option. It is important to understand options thetas so that you can invest smarter, applying options strategies which can turn time decay into profits.

#### Application

Knowledge of an options theta is especially important for neutral based options strategies whose goals are to profit from time decay. Traders using the popular Calendar Call spread  trading strategy are using such a tactic.

If you are speculating on a short term, moderate move on the underlying stock of the option, options should be bought with a very low negative options theta. Otherwise, time decay can wholly eat up the profits from such small moves.

#### Aggregate Options Theta

It is important to know not just the options theta of individual  stocks, but the aggregate options theta of your entire portfolio. This is calculated by merely adding up all the options thetas of your individual options. If your aggregate options theta is negative, then you will get a good profit if the market moves very quickly. If your aggregate options theta is positive, then you will do better if the market moves slower.