Theta
Principles of Finance glossary · Time Value of Money
Definition
The sensitivity of an option's value to the passage of time.
Theta in plain English
An 'option' is a contract giving you the right to buy or sell something at a set price before a deadline — and like a coupon, it's worth less as the deadline creeps closer with nothing gained. Theta measures exactly that: how much value the option loses each day simply because time is passing. Traders call it 'time decay,' and it's usually a cost to whoever owns the option — think of an ice cube slowly melting whether or not anything else happens. If theta is -0.05, the option tends to lose about five cents of value per day, all else equal.
Practice Theta
Which Greek measures an option's sensitivity to the passage of time?
Related Principles of Finance terms
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