Theta Examples
Theta has different practical meaning depending on whether the position is long premium, short premium, or part of a spread.
Long call
A long call often has negative theta. If the underlying stock does not move enough, the option may lose value as expiration approaches.
Example: A call priced at $2.50 with theta of -0.04 may lose about $0.04 per share per day from time decay, before other effects.
Long put
A long put can also have negative theta. The position may need enough downside movement to overcome time decay and other pricing changes.
Covered call
A covered call seller may benefit as short option premium decays, but the trade can cap upside and still has underlying stock risk.
Short put
A short put may benefit from theta if the underlying stays above the strike, but losses can be substantial if the underlying falls.
Vertical spread
A spread combines long and short options, so the net theta may be smaller than the theta of either individual leg.
Near expiration
Theta can become more noticeable as expiration approaches, especially for at-the-money options. Short time remaining can make position behavior more sensitive.