Theta Θ

Theta is arguably the most important sensitivity of the Greeks and is certainly on a par with delta.

The characteristic of option prices to change purely as a result of the passage of time is known as Time Decay. Theta is a measure of how Time Decay affects the option premium. As such, theta is nearly always negative for bought options.[1] This makes sense because Time Decay erodes the option value as time to expiration diminishes.

[1] Theta can be positive for Deep In the Money puts in certain scenarios.

Memory Tip

Theta starts with a T and stands for Time.

Example 6.3.1. Time Decay

You pay me $1.00 for an OTM option with 10 days until expiration.

With each day that passes, let’s say the option loses $0.10 of Time Value. (Please note ...

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