Theta
Quantitative Finance glossary · Derivatives Pricing & Volatility Surfaces
Definition
The sensitivity of an option's value to the passage of time; time decay.
Theta in plain English
Theta measures how much an option loses in value just because a day has gone by — nothing else needs to change. An option is basically a bet that has an expiration date, and the more time left, the more chances the bet has to pay off; as the clock ticks down, those chances shrink, so the option quietly bleeds value. Think of a paid concert ticket you're trying to resell: the closer you get to showtime with no buyer, the less anyone will pay, until at the door it's worth almost nothing. Theta is usually negative for the option's owner, meaning time is working against you, and that daily leak speeds up as expiration nears.
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