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.