Theta is the daily decay of an option’s extrinsic value. This metric is the cloudiest of all, as it assumes implied volatility & price movement are held constant. For this reason, it’s better to think of theta decay from the bigger scheme of things.
The most important aspect of theta to remember is that it assumes implied volatility & price movement are held constant. Markets move every second, so it is unrealistic to expect them to be frozen. We can’t look at our options and expect the value to decrease by theta every single day. While theta will come out of the option, price movement & implied volatility will change the value as well. As long as we’re on the right side of the coin (positive theta), we can rest assured that our option’s extrinsic value will get lower and lower as we reach expiration, which is one of the keys to success for an option seller.
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