Theta
Theta measures how much an option's price decreases each day due to time decay, assuming all other factors stay constant. It's one of the "Greeks" used in options trading and is always negative for long option positions.
Understanding the Concept
• Theta accelerates as expiration approaches (decay speeds up) • Option sellers benefit from theta decay; buyers fight against it • At-the-money options have the highest theta • Weekend theta decay can be priced in differently by the market
Real-World Example
A call option has a theta of -0.05, meaning it loses $5 in value each day from time decay alone (for a 100-share contract). If you own this option and the stock doesn't move, you'll lose $5 per day. Option sellers love this because they profit as buyers' options decay toward zero.
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