Lesson 2 of 5

Theta -- Time Is on YOUR Side

What Is Theta?

Theta is how much your option loses per day just from time passing. If theta is -0.05, the option drops about $0.05 per share per day -- that's $5 per contract per day. As a seller, that's $5 per day going into your pocket. Theta is the reason the wheel works. It's the engine behind every trade.

Theta (daily time decay)

Theta = Change in Option Price / Change in Time (per day) | Always negative for long options, positive benefit for sellers

Why Theta Accelerates Near Expiration

Here's what most people don't realize: time decay isn't a straight line. An option barely decays at 60 DTE, decays steadily at 30 DTE, and absolutely melts inside of 21 DTE. The last week? The option is practically evaporating. This is why I sell at 30-45 DTE -- I'm entering right as the decay starts ramping up. And I usually close around 14-21 DTE or at 50% profit, whichever comes first.

The Square Root of Time Rule

Time value decays proportional to the square root of remaining time. In plain English: an option with 4x the time left doesn't have 4x the time value -- it has only about 2x. This is why the last 30 days of an option's life see the most aggressive decay per day. Math is on the seller's side here.

Theta and Strike Selection

ATM options have the highest raw theta because they carry the most time value. But we don't sell ATM in the wheel -- too aggressive. The OTM puts we sell have lower absolute theta but high theta relative to their price. What matters is: how fast is this option decaying compared to how much I collected? That ratio is what drives real returns.

Theta in Action

You sell an AMD $140 put (30 DTE) for $2.80. Theta is -$0.06 per share, so the option is losing about $6/day per contract. After 15 days with AMD flat, the put might be worth $1.50 instead of the simple math of $2.80 - ($0.06 x 15) = $1.90. Why? Because theta accelerated. By day 25, daily decay might be $0.10+. This acceleration is your friend.

Maximizing Theta as a Wheel Trader

Sell at 30-45 DTE to enter right as the decay curve steepens. This is non-negotiable for me.
Close at 50% of max profit -- this captures the 'easy' theta and frees up capital for the next trade. Don't get greedy chasing the last 50%.
Avoid selling with less than 14 DTE unless you have high conviction. The premium is thin and gamma risk spikes (more on that later).
Stay consistently short premium. The theta edge compounds over many trades -- it's not about one big win, it's about 50 small ones.

The 50% Rule

I close most winning trades at 50% of max profit. Sold a put for $2.00? I buy it back when it hits $1.00. Why? Because the first 50% of decay happens way faster than the last 50%. Close it, free up the capital, and sell a new one. Backtests confirm this beats holding to expiration on risk-adjusted returns.

The short version

•Theta is daily time decay. If theta is -0.05, the option loses $5/contract/day. As a seller, that's your daily paycheck.
•Time decay accelerates hard inside 21 DTE. Sell at 30-45 DTE to ride this wave.
•Close at 50% profit to capture the fastest decay and free up capital. Don't hold to expiration for pennies.

Quick Check

1/3

An option has a theta of -0.05. Approximately how much value does one contract lose per day?

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