Theta (Θ) is one of the options greeks which are collectively used to determine how closely an options or warrants contract will track its underlying market. Specifically, theta is the rate at which the value of an options or warrants contract will change over the passage of time (i.e. its time decay). Theta is one of the most useful options greeks, but is not used as often as delta.
Calculation
Theta (Θ) is the first derivative of the value (V) of a single or group of options or warrants contracts, with respect to the passage of time (T). Theta is calculated as shown in the above calculation image.
Use In Trading
Theta is the number of points that the value of an options or warrants contract will change over the passage of one year (i.e. its time decay), but is sometimes given as the theta for a shorter time frame (e.g. one month, one week, or one day). Theta is a negative number for long calls and long puts (i.e. long options trades), and a positive number for short calls and short puts (i.e. short options trades). For example, the value of a long put with a weekly theta of -0.35 will decrease by $0.35 (or € or £, etc.) per week. The total theta for a combination of options or warrants contracts (i.e. more complicated options strategies) can be determined by adding the thetas of the individual options contracts.
