What is Theta?

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

Theta is a term used in trading to measure the rate of decline in the value of an option caused by time passing. This is independent from the actual value of the underlying asset. The theory behind theta is that as the exercise date approaches, the value of the option declines as there is less likelihood of it moving a lot in price.

Theta is used to measure the risk associated with holding an option for a period of time, but in practice it is not that important as it does not take into account the asset price, so therefore is not used that often.

An example of theta would be:

  • An option has a strike price of $50.00
  • The theta of the option is 7.5
  • Therefore, for every day that passes the value of the option should fall by $7.50

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Patrick Curtis

Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis. This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.