Theta (Θ) – Measures Time Decay

Theta represents how much an option’s price decreases every day due to the passage of time if all other factors remain constant. Since options have an expiration date, their value erodes over time, especially for ATM and OTM options. Theta is always negative for buyers, as they lose value over time, while option sellers benefit from time decay. The closer an option gets to expiry, the faster its time decay.

Significance:

• Short-term options decay faster than long-term options.
• ATM options have the highest Theta decay, losing value the quickest.
• Theta decay accelerates in the final week before expiry.
• Option sellers (writers) benefit from Theta, as they profit from time decay.
• Traders holding long positions must be cautious of rapid value erosion, especially near expiry.

Example (Nifty Weekly Option):

• A Nifty 22,000 Call has Theta = -5, meaning it loses ₹5 per day.
• If Nifty remains at 22,000, the option price drops from ₹100 to ₹95 the next day.
• If the market is stagnant, the value keeps decreasing until expiry.