theta
The rate at which an option loses value as time passes, representing time decay. Options lose value each day as expiration approaches.
Example
“With a theta of -$5, the option lost $5 in value each day simply due to the passage of time.”
Memory Tip
THETA = time decay. Options LOSE value every day. THEta = THe clock is ticking.
Why It Matters
Theta directly impacts how much money you can lose or gain on option positions as days pass. Understanding time decay helps you decide when to buy, sell, or hold options, and prevents you from holding positions that are quietly losing value even when the stock price stays the same.
Common Misconception
Many people think options only lose value if the stock price moves against them. In reality, options lose value every single day regardless of price movement, which means you can lose money on an option even if the stock stays exactly where it was when you bought it.
In Practice
Suppose you buy a call option on a stock with 30 days until expiration, paying $200 for the contract. If the stock price does not move at all over the next week, theta decay might reduce that option value to $170 simply because 7 days have passed and you now have only 23 days left until expiration. This $30 loss happened without any change in the stock price.
Etymology
From Greek 'theta', the eighth letter. Represents the time decay component of options pricing.
Common Misspellings
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