What Is Theta? Meaning & Example
Definition
Theta measures how much an option's value declines each day as expiration approaches, all else equal. This time decay works against option buyers and in favor of sellers.
Related terms
Delta estimates how much an option's price changes for a $1 move in the underlying asset. It also gives a rough sense of the probability of finishing in the money.
Expiration DateThe expiration date is the last day an option contract is valid. After it, the option either is exercised, assigned or expires worthless.
Option PremiumThe premium is the price paid by an option buyer to the seller. It reflects intrinsic value, time remaining and expected volatility.
What is Theta?
Theta measures how much an option's value declines each day as expiration approaches, all else equal. This time decay works against option buyers and in favor of sellers.
Can you give an example of Theta?
An option with a theta of -0.05 loses about 5 cents of value per day if nothing else changes.