In options trading, theta (Θ) measures how much an option’s price decreases as time passes — this is known as time decay.
🔹 What Is Theta?
Theta = the rate of change of an option’s price with respect to time, assuming all other factors (stock price, volatility, interest rates) remain constant.
Mathematically:
∂𝑉
Θ=----------
∂𝑡
Where:
V = Option price
t = Time to expiration
🔹 What Does Theta Tell You?
It shows how much value an option loses each day due to time passing.
Expressed as a negative number for long options (because they lose value over time).
Expressed as a positive number for option sellers (they benefit from time decay).
🔹 Example
If an option has:
Theta = -0.05
This means:
👉 The option will lose about $0.05 per day in value
👉 That equals $5 per contract per day (since 1 contract = 100 shares)
