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Black–Scholes & Greeks · BSM-09 · Core

Theta

What does Theta measure, in which units, and what does it not predict?

Plain English

Theta is the local effect of the clock.

How to read −0.08/day

One day passing initially removes about $0.08 of value.

Typical sign

Long vanilla options are often negative Theta.

Common mistake

Assuming time decay is linear from now to expiry.

One concept per page · original written lesson · 450 prose words · authored, not installed or production-approved

What you will learn and prerequisites

Read first: Read the notation

Theta measures the local effect of the clock with other inputs fixed. Remaining maturity T decreases as calendar time passes, so the two derivatives have opposite signs. This course divides the annual derivative by 365 for a calendar-day display.

A daily Theta is not a guaranteed overnight loss: spot and IV may also move.

Read the derivative as a sentence

Put Theta is −S e^(−qT)phi(d1)sigma/(2sqrt(T))−qS e^(−qT)N(−d1)+rK e^(−rT)N(−d2). Long options often have negative Theta, but not universally; some deep-in-the-money European put states can be positive.

Platforms can use different day counts or finite revaluation conventions. Compare definitions before comparing values.

Use it within its scope

Use the same elapsed time in approximation and repricing. A request for thirty days on a seven-day option must not charge thirty days of Theta while the price is silently floored at expiry. Reject or explicitly limit the shared applied horizon. The daily derivative changes as the clock runs.

The model boundary

The smooth formulas require positive spot, strike, volatility and remaining time. Zero time and zero volatility still admit explicit value limits, but smooth Greek availability needs separate rules. No invalid or zero input is silently replaced with a default. Continuous dividends, constant parameters and European exercise are modeling assumptions, not claims about every real option.

One complete numerical experiment

The shared fictional European call uses spot 100, strike 100, 30 calendar days, sigma 25%, continuous rate 4% and yield 1%. Its BSM value is 2.977574155; d1=0.070239317 and d2=-0.001433455. Values are per option unit before contract multiplication.

Raw Theta is -18.800737423395. The displayed convention gives -0.051508869653 option-value change per calendar day. Isolate one calendar day passing while holding every other input fixed.

Starting option value is 2.977574155222. The local estimate after the shock is 2.926065285569; a full-model recomputation gives 2.925659116658. Approximation minus recomputation is +0.000406168911. The difference shows the limitation of a local derivative, not a claim that the market must follow either number.

The graph varies only its labeled horizontal input. It is a series of controlled states, not historical observations or a future trajectory. Read its units before interpreting sign or magnitude.

Open the calculation without leaving this lesson

Calculate Theta

Same-page calculation. Closing restores the lesson position and originating control.

Theta=∂V/∂calendar_time=−∂V/∂T; call=−S e^(−qT)phi(d1)sigma/(2sqrt(T))+qS e^(−qT)N(d1)−rK e^(−rT)N(d2)

T is years remaining; calendar time has the opposite derivative sign. N is the standard normal CDF and phi its density.

  1. d1=0.070239316937; d2=-0.001433455448.
  2. Raw=-18.800737423395; display multiplier=0.0027397260274.
  3. Displayed=-0.051508869653.
  4. Local affected measure=2.926065285569.
  5. Recomputed affected measure=2.925659116658.
-0.051508869653 option-value change per calendar day

Theta across controlled states

Vertical: option-value change per calendar day
Horizontal: Calendar days remaining

Theta across controlled statesOriginal BSM calculation with only the x-axis input varied. All other inputs are stated in the example; the curve is not a prediction. The complete numerical data are available below.-0.286138-0.230932-0.175726-0.120519-0.065313-0.0101066118.836.654.472.290
1. Fictional example
Original BSM calculation with only the x-axis input varied. All other inputs are stated in the example; the curve is not a prediction.
Read the graph as a data table
Complete graph data; original fictional observations or model calculations
Calendar days remainingFictional example
1-0.265085
2-0.188616
3-0.154732
5-0.120741
7-0.102646
10-0.0865074
15-0.0713268
20-0.0622686
30-0.0515089
45-0.042702
60-0.0374355
90-0.0311599

A correct number can be misread

The stated unit is option-value change per calendar day. Mixing raw decimal derivatives with point shocks or calendar time with remaining time can magnify or reverse the result.

The controlled comparison also omits live spread, surface dynamics, unsupported exercise effects and execution. A local sensitivity is not a market forecast or a guarantee of realized P/L.

Check your understanding

Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.

What is the displayed Theta in this example?

Reveal the worked answer

-0.051508869653 option-value change per calendar day.

Always state the unit.

Critical risk question

Does model agreement prove the same live-market change?

Reveal the worked answer

No.

Actual inputs, instrument features and executable quotes can differ.

Takeaway

Translate Theta into its specific input, affected quantity and unit before applying it. Revalue when the local approximation no longer fits.

Try it in the working lab

  1. Keep all scenario changes zero except one day passing.
  2. Compare Theta/day with full repricing.
  3. Try seven days remaining, then exactly seven days passing; distinguish the boundary result from a small local estimate.

Your live inputs are independent of the fixed worked example above. Return to the “Lesson example” preset to reproduce it.

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Sources, assumptions and downloadable script

External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.

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