Theta Decay
The daily erosion of an option's time value due to the passage of time alone, all else equal. Theta is the Greek that measures this erosion in dollars per day per share. The decay is non-linear -- it bleeds slowly at first and accelerates sharply in the final weeks before expiration. For long-option buyers, theta is a structural headwind every single day the position is held; for short-option sellers, theta is the structural income they collect for taking on the risk. Calm sideways markets are theta's most aggressive regime: with no offsetting delta gain to mask it, the daily bleed is fully visible in the option's P&L.
Lessons that use this term
Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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