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Theta Decay

An option loses something valuable as the calendar moves forward: time. Theta estimates how much of the option’s value may disappear each day if other factors remain unchanged. An option with theta of -0.05 may lose about $0.05 per share over one day from time decay alone. The effect usually becomes faster as expiry approaches, particularly for options close to the current market price. Theta works against option buyers but can benefit sellers who collect the option premium. Real prices will not follow theta exactly because the underlying asset, expected volatility, and interest rates may also move at the same time.

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