Definition
Theta is one of the option Greeks. It measures how much an option's value is expected to fall with the passage of a single day, holding all other factors constant. Theta is usually expressed as a negative number for option buyers, because time works against them.
Theta quantifies time decay — the steady erosion of an option's time value as expiration approaches. It is the cost a buyer pays for holding, and the income a seller collects for waiting.
Why it matters
How it works
Theta is the derivative of the pricing model with respect to time. A theta of negative 0.05 means the option is expected to lose about five cents of value per share if one day passes and nothing else changes. Decay is not linear: an at-the-money option loses time value slowly when far from expiration and rapidly in the last few weeks. Buyers fight theta and need the underlying to move enough to outpace it; sellers harvest it, which is why many income strategies sell shorter-dated options. Understanding theta helps a trader match the holding period to how fast the position will bleed value.