Option Greeks: Theta

Theta measures the rate of decline of an option's value with the passage of time, and is one of the most important greeks that an option trader has to consider. We look at the basic definition of theta, and give the various formulas for theta for the Black-Scholes family of European options. We describe the effects of option moneyness, time, and volatility on theta, and compare theta with gamma. We finish with a discussion of the differences between time decay and theta, and explore the effects of volatility surfaces and theta.