Theta

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Dictionary Says

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.
Investopedia Says

Investopedia explains '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.

Related Definitions

  •

    Greeks

    Dimensions of risk involved in taking a position in an option (or other derivative). Each risk variable is a result of an imperfect assumption or relationship of the option with another ...
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  • Charm

    The rate at which the delta of an option or warrant will change over time. Charm refers to the second order derivative of an option's value - once to time and once to the price. It is ...
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  • Time Decay

    The ratio of the change in an option's price to the decrease in time to expiration. Since options are wasting assets, their value declines over time. As an option approaches its expiry ...
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    • Delta

      The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio".
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    • Gamma

      The rate of change for delta with respect to the underlying asset's price. Gamma is an important measure of the convexity of a derivative's value, in relation to the underlying. In a ...
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    • Lambda

      The ratio of the percentage change in an option contract’s price to the percentage change in the option’s underlying price. Lambda is one of the Greeks – a collection of risk measures or ...
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    • Vega

      The measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% ...
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    • Maturity

      1. The length of time until the principal amount of a bond must be repaid. 2. The end of the life of a security.
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    • Strike Price

      The price at which a specific derivative contract can be exercised. Strike prices is mostly used to describe stock and index options, in which strike prices are fixed in the contract. ...
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    • Risk

      The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk ...
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