Theta

The next most commonly encountered Greek is the theta. The theta provides an estimate of how quickly your option is losing it time value.

Theta: The amount that the price of an option changes as compared to the passage of a unit of time (typically one day).

The value of theta is always a negative number, because the value of an option diminishes over time. In the terminology of options, the loss of time value is referred to as theta decay.

As a rough guide, the magnitude of theta for an at-the-money option varies inversely as the square root of the time remaining until expiration. For example, an option that has 40 days until expiration loses time value twice as fast as it did when it had 160 days until expiration [square root (160/40) ...

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