Theta is an option Greek that measures the rate at which an option’s value will decrease over time as the expiration date approaches. Theta is also known as time decay because it reflects the declining time value of an option as it gets closer to its expiration date. All else being equal, an option will lose value as time passes, and Theta quantifies how much value an option will lose per day. For example, if an option has a Theta of -0.05, it means that the option will lose 5 cents in value for every day that passes, assuming that all other factors remain constant. Theta is particularly important for traders who employ short-term options strategies. These traders must be aware of Theta, as it can erode the value of their options over time, potentially leading to losses. On the other hand, option sellers can benefit from Theta, as they can earn income from the time decay of the options they sell.
