A Long/Short Equity Fund will build a portfolio with Long Stocks and Short Stocks. The extent of exposure to the market can be determined by looking at Beta. On the other hand, if you are trading in options, then the total exposure of your options positions to the market can be determined by looking at Position Delta that shows you the Risk. Position Theta, however, shows you how much time decay you have in your portfolio.

Theta is the changed in an option’s value given a one-day change in time. An option will lose money every single day because of their exposure to time decay. In the case of a Short Option, that is either Short Call or Short Put, you will benefit from time decay because the option premium will decrease.

While all options lose value over time, the rate at which an individual option loses value is not linear and is primarily a function of how much time remains until expiration. The rate of decay usually increases as we near expiration. This is why options tend to lose the most in value in the final 30 days due to the acceleration in the price decay.

Position Theta is expressed as a negative number that indicates how much your account can lose or make on a daily basis due to time decay. A positive Theta value is when you benefit from time decay and is the ideal time to sell options. Theta has an inverse relationship with Gamma. Long Options usually have positive Gamma and negative Theta, as they benefit from the increase in Implied Volatility, and will lose value due of Theta.

Since the time remaining on an option can never increase, time decay is a one-way street – you will always lose money as time passes if you are long on the contract. If the stock does not move, the value of the option will approach zero as long as it remains out-of-the-money. You have to keep this in mind when you buy Long Options or have Short Options in your portfolio. Again, it is very important to look at the overall portfolio, and see if it benefits from the time decay or if you are actually exposed by the time decay.