theta

Theta

A measure of the rate of decline in the value of an option due to the passage of time. Theta can also be referred to as the time decay on the value of an option. If everything is held constant, then the option will lose value as time moves closer to the maturity of the option.

Theta is part of the group of measures known as the "Greeks" (other measures include delta, gamma and vega) which are used in options pricing.

Investopedia Commentary

For example, if the strike price of an option is $1,150 and theta is 53.80, then in theory the value of the option will drop $53.80 per day.

The measure of theta quantifies the risk that time imposes on options as options are only exercisable for a certain period of time. Time has importance for option traders on a conceptual level more than a practical one, so theta is not often used by traders in formulating the value of an option.

Theta is the 8th letter in the Greek alphabet.

Related Links

Getting To Know The "Greeks"
Using the Greeks to Understand Options
Options Basics Tutorial

See also: Delta, Gamma, Greeks, Lambda, Maturity, Option, Risk, Strike Price, Time Decay, Vega

Also spelled: teta, hteta, time decay

theta

The sensitivity of an option's market value relative to a change in the time to expiration. Theta is a measure of time decay and tends to grow larger as an option approaches expiration.

theta the·ta (thā'tə, thē'-)
n.

Symbol θ The eighth letter of the Greek alphabet.