What does Theta represent in options trading?

Theta represents the rate of decline in the value of an option due to the passage of time, often referred to as time decay. As an option approaches its expiration date, the time value of the option decreases, which means its price decreases as well, if all other factors remain constant. Theta quantifies this time sensitivity and indicates how much the price of an option is expected to decrease on a daily basis as it approaches expiration.

In the context of options trading, understanding theta is crucial for options traders as it helps them assess the potential impact of time decay on their positions. If an option has a high theta, it implies that it will lose value more quickly as time passes, which can significantly affect trading strategies and the overall profitability of options positions.