How Does a Market Maker Use the Theta Greek to Estimate the Daily Decay of an Option’s Value?

Theta measures the rate at which an option's price declines due to the passage of time, also known as time decay. A market maker uses Theta to estimate the daily loss in value of their long option positions and the daily gain in value of their short option positions.

Theta is highest for at-the-money options near expiration. This estimate is crucial for determining the profitability of holding a portfolio overnight and for setting option prices.