Theta Decay Options Interview Guide
Theta decay options interview guide covering time decay, time value, gamma tradeoff, volatility, examples, and caveats.
Candidates discussing time decay, carry, gamma, and volatility.
Theta measures time decay
Theta estimates how option value changes as time passes, holding other model inputs fixed over a small interval and convention.
Theta is linked to optionality
Options with valuable convexity, event exposure, or volatility sensitivity can lose time value while still offering protection or upside.
Concrete example
A short-dated at-the-money option may lose time value quickly, but a large move can overwhelm the expected theta decay before expiry.
Short theta is not free carry
Selling options can collect decay but exposes the seller to gamma, vega, jump, liquidity, and margin risk during stress.
Common mistakes
Candidates often call theta predictable profit. In interviews, connect theta to gamma, volatility, events, and hedging costs.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.