What Is Theta?
Theta measures the rate at which an option's value declines as time passes, commonly called "time decay." If an option has a theta of -$5, it loses $5 of value per day, all else being equal. Theta accelerates as expiration approaches — an option loses more time value in its final week than in its first month.
How Theta Works
Theta affects option buyers (who lose value to time decay) and option sellers (who collect value from time decay) oppositely. Buying options is fighting theta — the underlying must move enough to overcome the daily drain. Selling options is collecting theta — the seller profits if the underlying doesn't move enough to overcome the premium received.
Why It Matters for Traders
In crypto options (on Deribit, for example), theta is significant because of high implied volatility. While high IV makes options expensive to buy, it also means option sellers collect larger premiums. Understanding theta dynamics helps traders choose between buying options (when a big move is expected soon) and selling options (when collecting premium during range-bound periods).