Theta Decay
Theta Decay (or "time decay") is the daily loss in an option's premium purely due to the passage of time, holding spot and IV constant. Theta is expressed as ₹/day. It is negative for option buyers and positive for option sellers . Plain-English exam
Theta Decay (or "time decay") is the daily loss in an option's premium purely due to the passage of time, holding spot and IV constant. Theta is expressed as ₹/day. It is negative for option buyers and positive for option sellers.
Plain-English example
BANKNIFTY 52,000 Call has 7 days to expiry, premium ₹140, theta = −₹15/day. If spot and IV stay perfectly still: tomorrow premium ≈ ₹125, day after ≈ ₹110... by expiry ≈ ₹0. Theta accelerates non-linearly — final 3 days lose more value than first 4. This is why "long-option weekends" are punishing.
When it matters
- Buying short-dated OTM options = bleeding theta heavily; need a fast directional move to overcome it
- Selling premium (covered calls, iron condors, credit spreads) profits from theta when the underlying stays in a range
- Theta is highest for ATM options and accelerates in the final week
Theta and IV interact
High-IV options have richer premium and absolutely more theta to bleed. An IV crush + theta combo can wipe out an option-buyer in hours, even on a correct direction call.
SEBI caveat
Theta-positive strategies (option-selling) appear "safe" but carry tail risk that can dwarf months of premium income. SEBI's F&O loss study covers both sides. Educational only, not a recommendation.