Theta: Definition & Uses in Options Trading

What Does Theta Mean in Options Trading?

By Matthew Frankel, CFP – Updated Aug 17, 2025 at 8:32 PM

Key Points

Intrinsic value is the current worth of an option if exercised now; time value decreases as expiration nears.
Theta measures the daily decrease in an option's time value as it approaches its expiration date.
Understanding theta helps gauge time decay risk in options, crucial for effective trading strategies.

When you trade options, the price you pay (or are paid) for an options contract has two components: intrinsic value and time value. Intrinsic value can be thought of as the value of the option if it were exercised today.

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Intrinsic Value

The intrinsic value of a stock is its true value. It refers to what a stock (or any asset, for that matter) is actually worth -- even if some investors think it's worth a lot more or less than that am

For example, if you have a call option that allows you to buy a stock for $20 and it is trading for $22, the intrinsic value of the option is $2. Conversely, if your option allows you to buy a stock for $20 per share and it is trading at $19, your option has no intrinsic value.

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Person learning about stocks and call versus put options while investing. — Image Source: The Motley Fool

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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