Theta
Theta describes the estimated change in option value as time passes, with the underlying price, volatility and other assumptions held constant. Conventions differ: some quote the signed change per day, while others describe the magnitude of time decay. Theta varies with moneyness and time to expiry; actual option prices also respond to other factors. It is a model sensitivity, not a guaranteed loss each day, and is distinct from delta, which measures sensitivity to the underlying price. Check the relevant paper's assessed option-model requirements.
Worked example
An option has quoted theta of −$0.04 per day. As a local approximation, one day passing with other inputs unchanged reduces its model value by about $0.04 per underlying unit. Actual change can differ when prices or volatility move.
Common mistake
Treating theta as a fixed daily cash payment or assuming time passage is the only influence on an observed option price.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |