What Is the Relationship between Gamma and Time Decay (Theta)? ▴ Learn

What Is the Relationship between Gamma and Time Decay (Theta)?

Gamma and Theta have an inverse relationship, often summarized by the 'Gamma-Theta Trade-off'. Options with high Gamma, typically At-the-Money (ATM) options, also tend to have the highest negative Theta, meaning they experience the fastest time decay.

This is because the market is compensating the option buyer for the high leverage and sensitivity (high Gamma) with a higher rate of time value erosion (high negative Theta). Conversely, deep ITM or OTM options have low Gamma and low absolute Theta.

How Does Theta Affect Deep In-the-Money Options versus At-the-Money Options?

What Is the Relationship between Theta and Gamma?

In a Volatile Market, Is a Trader More Likely to Experience Positive or Negative Slippage?

Does Theta Affect In-the-Money, At-the-Money, and Out-of-the-Money Options Equally?