Theta (Time Decay)
Theta measures how much an option’s price tends to fall each day due to time passing, assuming spot and IV stay constant. It’s the “rent” you pay (or collect) for holding options.
Who benefits from theta?
- Option sellers: Collect theta; option premiums erode over time.
- Option buyers: Pay theta; need directional or IV moves to offset decay.
Simple example
A NIFTY 23200 PE is trading at ₹120 with theta = −8.5 per day (per unit).
All else equal, after 1 day, the option might be worth roughly ₹111.5.
For 1 lot (25 units), that’s about ₹212.5 of time decay.
All else equal, after 1 day, the option might be worth roughly ₹111.5.
For 1 lot (25 units), that’s about ₹212.5 of time decay.
How theta behaves
- Theta accelerates as expiry approaches, especially in the last 7–10 days.
- ATM options usually have the highest absolute theta.
- Far OTM/ITM options have lower theta (less time value to decay).
Using theta intentionally
Common approaches:
- Selling options (or spreads) to collect theta when you expect low movement.
- Buying options only when you expect a move large/faster enough to beat theta.
- Avoiding long OTM options very close to expiry unless you’re speculating on a big spike.
Next: See how IV moves (vega) can overpower theta around events in the Vega article.