Theta

Theta decay erodes time value as expiration nears

Theta represents the rate at which an option's time value decreases over time. As expiration approaches, the time value erodes faster due to theta decay.

Example

Consider a call option with a theta of -0.05. If 30 days remain until expiration, the time value decreases by 1.5 (0.05 x 30). As expiration nears, this rate accelerates, eroding the time value more rapidly.

Remember this

Understanding theta decay is crucial for traders to manage risk and make informed decisions about holding or selling options as expiration nears.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

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