Derivatives
Time decay (theta)
Also called: theta decay
Time decay, measured by theta, is the loss in an option's time value as expiry approaches, with all else unchanged.
Every option carries time value, and time value has to reach zero by expiry. Time decay is that loss. Theta is the Greek that measures it: the amount the premium is expected to fall in one day if the underlying price and implied volatility stay where they are. A theta of minus 8 means about ₹8 per unit lost per day.
Decay is not a straight line. It is slow when expiry is far away and speeds up sharply in the final days, most of all for at-the-money options, which hold the most time value. An option with a month left may lose a few rupees a day. The same strike in its last week can lose that much in an hour of a flat market.
Time decay hurts buyers and pays sellers. The buyer has limited risk but a clock running against the position. The seller earns the decay but carries large risk if the market runs. For an intraday option buyer the move has to come quickly. A sideways session from 11:00 am to 2:00 pm can drain a premium even though the index ends where it started.
The common mistake is holding a bought option and waiting, the way one might hold a stock. A stock that goes nowhere for three days costs you nothing. An option that goes nowhere for three days has lost three days of theta. The second mistake is buying near-expiry options because they are cheap, without seeing that most of their time value is about to vanish.
Worked example
A flat day in a Nifty call
Illustrative numbers. Nifty is at 25,000 with a few sessions to expiry. You buy the 25,000 CE at ₹90, all time value, with theta near minus 18. Nifty closes at 25,000 again. The option is now around ₹72: you have lost ₹18 per unit, 20 per cent of the premium, with no move against you. With delta near 0.5, Nifty would need to be about 36 points higher to bring it back to ₹90.
In WizeBuySell
WizeBuySell does not measure theta and does not account for time decay. It reads price and plots entry, targets and a stop-loss. If you trade a signal through a bought option, the decay is yours to manage: which expiry to pick and how long to stay in a trade that is not moving. A signal that takes hours to reach T1 can still lose money in a near-expiry option.