What is Theta in Options?

Theta measures the effect of the passage of time on an option’s premium. It is commonly associated with “time decay”. As an option approaches expiry, the time available for a favourable price movement decreases. Therefore, an option’s time value generally declines as expiry approaches. To better understand how theta affects options prices, let’s study an example:

Consider a call option with a premium of ₹50 and 3 days remaining until expiry. Suppose its Theta is -₹3 per day. If the stock price, volatility, and other factors remain unchanged, the option’s premium may decline by approximately ₹3 each day due to time decay.

Thus, Theta represents the estimated daily reduction in an option’s value due to the passage of time (assuming other factors remain unchanged).

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