Understanding Theta Decay

Theta measures the rate of decline in the value of an option due to the passage of time. Because options have a limited lifespan, the "opportunity" they provide to profit from a price move shrinks every single day.

If an option has a Theta of -0.05, its price will theoretically drop by ₹0.05 every day, all else being equal. As an option buyer, Theta is a constant drain on your account balance.

Theta is not linear. The decay is relatively slow when an option is 60–90 days from expiration. However, as the expiration date approaches, the "time value" collapses at an exponential rate.

This is why holding OTM (Out-Of-The-Money) options for too long is a losing game. You aren't just betting on the stock price—you are betting that the stock moves faster than the erosion caused by Theta.

• For Buyers: You need high volatility or strong momentum. You want the move to happen before Theta erodes your premium. Avoid holding options through quiet, low-volatility periods.
• For Sellers: You want the market to remain stagnant. You are collecting "rent" from the buyer in the form of Theta decay every day. This is the cornerstone of "Income Trading" strategies.