Theta
Measures time decay of an option's value.
What is Theta?
In the world of options trading, Theta is one of the primary "Greeks" used to measure risk sensitivity. While option prices may seem random to outsiders, they are driven by mathematical variables. Theta isolates one of these specific drivers.
The Sensitivity
- Measures: How much the option's value changes in response to changes in a specific market variable (e.g., price, time, volatility).
- Unit: Expressed as a value per unit change in the underlying factor.
How to Interpret It
| Sign | Implications |
|---|---|
| Positive (+) | The position gains value as the underlying factor increases. |
| Negative (-) | The position loses value as the underlying factor increases. |
For example, if you are "Long Theta," you generally want exposure to that specific risk factor. If you are "Short Theta," you are hurt by it.
Practical Application
Professional traders don't just "buy calls"; they manage a portfolio of Greeks. Managing Theta allows you to:
- Hedge Risk: Neutralize unwanted exposure (e.g., "Delta Neutral").
- Target Alpha: Bet purely on this specific variable (e.g., "Gamma Scalping").
Tip: Theta is not static. It changes as the stock price moves and time passes. This "second-order" change is also measured by other Greeks (like Gamma or Vomma).
This entry is part of the VolParadox Options Glossary, a living database of trading terminology.