What is theta?
Since options have a defined life or set expiration date, Theta is one of the most important of the variables. At expiration they will either expire worthless or be converted to shares of stock. That is a given. Knowing how much time decay an option will incur allows a trader to calculate his risk of owning or premium capture if they were a seller of the option.
The rate of decay increases exponentially as the option gets closer to expiration. In-the-money options have what is known as both intrinsic values which represent the amount of premium in relation to the strike with regards to parity to the underlying. Extrinsic value is the amount of excess premium in relation to parity with regards to the underlying.
To learn more about Theta, check these out:
Options Playbook Radio 9: Getting to Know Theta