Theta

Theta decay erodes time value as expiration nears

Theta represents the rate at which an option's time value decreases over time. As expiration approaches, the time value erodes faster due to theta decay.

Example

Consider a call option with a theta of -0.05. If 30 days remain until expiration, the time value decreases by 1.5 (0.05 x 30). As expiration nears, this rate accelerates, eroding the time value more rapidly.

Understanding theta decay is crucial for traders to manage risk and make informed decisions about holding or selling options as expiration nears.

Related concepts

Greeks (finance)

Greeks measure sensitivity of option prices to underlying parameters

Vega

Vega is the fifth-brightest star in the night sky

Straddle

Straddle strategy profits from large price movements in either direction

implied volatility tells you

Implied volatility indicates the market's expectation of future price movement

High-frequency trading

HFT firms move in and out of positions in seconds or fractions of a second

Cronbach's alpha

Cronbach's alpha (α) measures internal consistency

Educational content, not financial advice.

One email a day: 5 concepts + the 5 stories that matter →

Swipe through 100 ML concepts daily

Open TickerNews