What is Theta (The Greeks)?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “The Greeks - Theta”.
Theta is not used much by traders, but it is an important conceptual dimension. Theta measures the rate of decline of time-premium resulting from the passage of time. In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears.
Some additional points about theta to consider when trading:
1. Theta can be very high for out-of-the-money options if they contain a lot of implied volatility.
2. Theta is typically highest for at-the-money options
3. Theta will increase sharply in the last few weeks of trading and can severely undermine a long option holder's position, especially if implied volatility is on the decline at the same time.

By Barry Norman, Investors Trading Academy