One-Sentence Definition
The Theta Index measures the rate at which value tends to change over time due to time passage alone, independent of other variables.
What It Measures
- Time-based decay or accrual: how value changes as time elapses.
- Isolation of time: holding other drivers constant to focus on temporal effects.
- Rate of change: a normalized way to compare time sensitivity across contexts.
Where It’s Used
- Derivatives & options analysis: describing time decay in option valuation.
- Risk & hedging frameworks: understanding exposure as maturities shorten.
- Model validation: checking observed decay against assumptions.
- Research & benchmarking: comparing time sensitivity across products or periods.
Why an Index Matters
Time effects are often subtle but persistent. A standardized index provides a shared reference for describing and comparing time-driven change, improving clarity across analyses.
The Theta Index is descriptive in nature. Interpretation depends on context, assumptions,
and how time is isolated from other factors.
Scope & Terminology Note
“Theta” appears across many disciplines. This page uses “Theta Index” in the sense of a time-sensitivity benchmark, not a proprietary product or formula.