If you've ever traded options, you're likely aware of the “Greeks.”

Delta, which compares the change in price of an underlying asset with the corresponding change in the price of a derivative, and vega, which measures an option's sensitivity to changes in the volatility of the underlying asset, are the most popular.

But theta is another valuable tool that can help you sharpen your options trading. Indeed, it's far more than just the eighth letter of the Greek alphabet.

The Data Behind Theta

Theta is one of the most significant concepts for options traders.

The “T” represents time – that is, the measurement of the time decay of an option. More specifically, it represents the dollar amount that the option will lose each day as time passes. Thus, it's an important gauge for both options buyers and sellers.

Think of theta as a risk measurement tool that quantifies the risk that time imposes on options.

As an example, if the strike price of an option is $1,275 and the theta is 60.11, then the value of the option, or its premium, will fall by $60.11 per day.

For options traders seeking income, theta is less significant than it is for directional traders. That's because if you have positive theta, you have negative gamma (the rate of change of delta).

Yes, options traders need to make sacrifices.

Realize also that theta isn't linear. For an at-the-money (ATM) option, theta increases in value as it approaches option expiration (as does gamma). This is the reverse of in-the-money (ITM) and out-of-the-money (OTM) options, which both decrease toward expiration.

This can be best visualized on a curve, as seen below.

Here you can see that the time value of the option is stable initially and decreases only slightly. But the rate of this decline grows until the final month, when the decline is most pronounced.

The Two-Faced Greek

By now you're probably wondering if theta can help you or hurt you. Well, it can do both.