⏳ Stock Option Theta

Definition

Theta (Θ) measures the rate at which an option’s value declines over time, assuming all other factors remain constant.
It represents the daily time decay of an option’s premium, and is typically negative for long options.

Why It Matters

Time Decay Awareness: Theta quantifies how much value an option loses each day as expiration approaches.
Strategy Alignment: Buyers are hurt by theta decay; sellers benefit from it.
Expiration Sensitivity: Theta accelerates as the option nears expiration, especially for at-the-money contracts.

Example

Suppose you own a call option with a theta of -0.05.
This means the option will lose approximately $0.05 in value each day, assuming no change in stock price or volatility.

Key Insights

Theta Behavior	Option Type	Implication
Negative	Long calls and puts	Value erodes daily; time works against the buyer
Positive	Short calls and puts	Time decay benefits the seller
Accelerates near expiration	At-the-money options	Rapid decay in final days