Theta

Part of an option's price is its time value, which reflects the possibility that the underlying asset's price will move favourably before expiry. As time passes, there is less opportunity for such a move, so time value shrinks. Theta measures the speed of this decline.

Theta is usually expressed as a negative number for option holders. For example, an option with a theta of −0.05 is expected to lose about 0.05 in value each day, if the share price, volatility and other factors remain unchanged.

Time decay is not constant. It tends to speed up as an option approaches expiry, especially for options that are at the money. An option with several months to expiry may lose value slowly, while one with only a few days left can lose value rapidly.

Theta matters for option strategies. Buyers of options are working against time decay and need the asset's price to move enough, and soon enough, to overcome it. Sellers of options benefit from time decay, collecting the premium as the option loses value, but take on the risk of large losses if the price moves sharply against them.