I have a Call Spread for a position in TSLA that has a theta of 15.67 with 43 days left till expiration. I can see that it's comprised of a 64.71 and a -49.04 theta.

How can I best understand what it means?

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Option prices consist of two parts: the intrinsic value (the difference between the strike and the current price of the stock) and a time premium, representing the probability that the stock will end up above the strike for a call (or below for a put).

All else being equal, options decline in value as time passes, since there is less uncertainty about the expected value of the stock at expiration and thus the time premium is smaller. Theta is the measure of the change in value in one day. So for every day that passes, the calls you sold are going down in value by $64.71 (which means your theta is positive to you since you sold them at a higher value) and the calls you bought are going down in value by $49.04. So your position (a short spread) is gaining $15.67 each day (assuming no change in stock price or volatility).

On a per-share level, since you traded 10 contracts (totaling 1,000 shares), your per-share theta for each position is +6.47 cents and -4.904 cents, for a net theta per share of +1.576 cents per day.

Also, theta is not constant over time. It increases slowly until you get close to expiration, then increases more rapidly.

In reality, the stock price and volatility also change every day, and those are much stronger drivers of the value of your options. In your case, however, the options are deep out of the money, meaning it's very likely that they'll expire worthless, so all you have left is time premium, which is decaying as time goes on.

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  • So if the average premium I received for the position is $0.30, you're saying that the premium price is going down by $15.67 per DAY? (Assuming everything else holds equal)? How can that be if the premium was only $0.30? – Shamoon Apr 13 '17 at 17:13
  • @Shamoon That's the premium per share. The Theta if for the whole position One option contract is typically 100 shares. How many contracts did you buy? – D Stanley Apr 13 '17 at 17:19
  • I bought 10 contracts, so that's $300 premium received. Every day, assuming all else is equal, that means I can buy it back for $15.67 less? – Shamoon Apr 13 '17 at 17:20
  • So dividing those by 1,000 (10 X 100), your theta per share is 6.471 cents on the buys and -4.904 cents on the sells, for a net decline of 1.567 cents per day. The change is also per trading day, not per calendar day; there are roughly 20 trading days until those option expire. – D Stanley Apr 13 '17 at 17:25
  • Theta is measured in cents or dollars? Because if it's 1,000 shares and the net theta is 15.67, that's $1.567 per day, not cents, right? – Shamoon Apr 13 '17 at 17:28

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