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

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.

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