Theta

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DEFINITION of '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.

BREAKING DOWN 'Theta'

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.

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