What does theta represent in terms of options?

Theta is a crucial concept in options trading, representing the rate at which an option's premium or price declines as it approaches its expiration date. It effectively measures the time value sensitivity of an option’s premium. Time decay is a fundamental aspect of options pricing; as time passes, the likelihood of an option finishing in-the-money decreases, thereby reducing its time value.

In this context, a negative theta indicates that an option's price will decrease as expiration approaches, assuming all other factors remain constant. Traders consider theta when making strategic decisions about when to buy or sell options. For instance, those who are long options (holding the options) are typically concerned with theta because their positions lose value as time passes. Conversely, those who are short options (selling the options) can benefit from time decay.

The other responses do not accurately capture the essence of theta. While changes in market conditions can impact options pricing, this is more related to factors like delta or vega rather than time sensitivity. The overall risk of the underlying asset relates to different greeks such as delta and volatility but doesn't encompass the specific measurement that theta represents. Lastly, correlation with other investment vehicles does not pertain to theta and is more relevant in discussions of portfolio risk and diversification strategies.