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.

Related concepts

Greeks (finance)

Greeks measure sensitivity of option prices to underlying parameters

Vega

Vega is the fifth-brightest star in the night sky

Lattice model (finance)

How can you price an option that doesn't expire?

Straddle

Straddle strategy profits from large price movements in either direction

put-call parity states: C - P = S - K·e^(-rT)

Ever wondered how options and futures can be linked?

List of cognitive biases

Why do you choose a smaller reward now over a bigger one later?

Educational content, not financial advice.

Swipe through 100 ML concepts daily

Open Pocket Polymath