Definition
Theta is the option Greek that estimates how much an option's price falls as one day passes, holding the underlying price, volatility and interest rates constant. It measures time decay, the gradual erosion of time value as expiry approaches.
How it works
An option's premium is intrinsic value plus time value, and theta describes how fast time value erodes. Long options usually have negative theta, which is a daily cost to the holder, while sold options have positive theta, which works in the seller's favor but comes with risk.
Decay is not linear: at-the-money options lose time value fastest in the final weeks before expiry. Textbook theta is expressed per year, so platforms divide it by 365 or 252 to quote it per day; check which. Positive-gamma positions typically carry negative theta, because convexity has a time cost.
Formula / convention
Theta ≈ Change in option price per one day of time passing, other inputs unchanged; Daily time-decay cost = Theta × Multiplier × Number of contracts
Illustrative example
A fictional long option on Sample Co has a theta of −HK$0.05 per share per day and covers 1,000 shares. Time decay alone costs about 0.05 × 1,000 = HK$50 a day, or about HK$250 over 5 days if theta stayed constant. In practice theta usually grows in size as expiry nears, so the loss is not linear.
What to watch for
Constant-theta arithmetic is only a guide: price or volatility moves can easily outweigh decay, and data vendors differ on whether theta is quoted per calendar day, per trading day or per year.