Theta option greek

Theta shows how the price of an option will change in 1 day, or in other words, it shows the effect of time decay on the price of an option as it moves towards the expiration date.

What is time decay, and why does it happen?

As the expiration date approaches, the underlying asset has less and less time to move in a favorable direction for the option buyer (the move is favorable if the option gets deeper in the money.) Let's take an example. Suppose there are 2 options in the market with the same strike but different expiration dates. Both options are traded at the same price. Which option would you prefer, the one that expires in 3 days or the one that expires in a month? From the side of the buyer, the option that is more likely to be in the money is more promising, and this is an option with a farther expiration date because the underlying asset will be more likely to make the desired price movement.

Therefore, in the real world, these two options are unlikely to trade at the same price. The option seller wants to insure himself against the movement of the option in an unfavorable direction for him and in the right direction for the buyer, so he assigns a large premium for the option.

Out-of-the-money and in-the-money options decay almost linearly, while at-the-money options decay, intensifying as expiration approaches.