Theta is a measure of the rate of time decay of an options contract, representing the amount by which its value decreases as time passes. It is expressed as a negative value, as time decay works against the value of the option.
For example, let’s say you own a call option on Company XYZ with a theta of -0.05. If all other factors remain constant, the value of your call option will decrease by approximately $0.05 per day as it approaches its expiration date. This means that the longer you hold onto the option, the more its value will decrease over time. Traders can use theta to help manage risk and make informed decisions about when to buy or sell options contracts, based on their market expectations and risk tolerance. They may also use options strategies such as selling options with high theta values to take advantage of time decay and generate income.