What does "Theta" represent in options trading?

In options trading, "Theta" is a measure of the time decay of an option's price. Specifically, it quantifies how much the price of an option will decrease as it approaches its expiration date, assuming all other factors remain constant. As time passes, the probability of the option finishing in the money diminishes, which typically leads to a decline in the option's price. This characteristic is especially important for options traders to understand, as they need to manage positions accordingly to mitigate potential losses from time decay.

Theta is particularly relevant for options that are out-of-the-money or at-the-money as expiration approaches, as those options tend to lose value faster due to their decreasing time for profitability. Understanding this concept helps traders make informed decisions about when to sell, hold, or buy options based on their risk tolerance and market expectations.