Every option has a shelf life. Part of its premium is a payment for the chance that the index moves before expiry, and that chance shrinks every day. The loss of value from time alone is called time decay, and the Greek that measures it is theta.
What theta measures
Theta is the change in an option's premium when one day passes and nothing else changes: same index level, same implied volatility. For a bought option theta is negative, a daily cost. For a sold option the same amount is a daily income, as long as the index does not move against the seller.
Only time value decays. An option's intrinsic value, the part that is already in the money, does not shrink with time. That is why at-the-money options, which are all time value, decay the most in rupee terms.
Decay is not a straight line
The table follows one illustrative Nifty 25,000 call with the index held "at 25,000" and IV at 14% as the weekly expiry approaches. Days are calendar days.
| Calendar days to expiry | Premium per unit | Lost over the next day, per unit | Lost over the next day, one lot |
|---|---|---|---|
| 7 | ₹209.21 | ₹16.62 | ₹1,081 |
| 5 | ₹174.72 | ₹19.52 | ₹1,269 |
| 3 | ₹133.34 | ₹25.49 | ₹1,657 |
| 2 | ₹107.85 | ₹32.53 | ₹2,114 |
| 1 | ₹75.33 | ₹75.33 | ₹4,896 |
With a week to go the option loses roughly ₹16.62 a day. On the last day the whole remaining ₹75.33 of time value disappears. The time value of an at-the-money option is roughly proportional to the square root of the time left, so decay is slow far from expiry and fastest at the end.
About these numbers
All numbers here are illustrative: Nifty "at 25,000", implied volatility 14%, interest rate 6.5%, computed with the Black–Scholes model. They are not current market prices.
Why Tuesday matters for Nifty
Nifty 50 weekly options on NSE expire on Tuesday, and the monthly contract on the last Tuesday of the month. Sensex weekly options on BSE expire on Thursday. Other NSE index options such as Bank Nifty have monthly expiries only, also on the last Tuesday. When the expiry day is a trading holiday, the contract expires on the previous trading day.
- Because Nifty has a weekly contract, there is always an option a few days from expiry. That is where decay is fastest and where much of the retail volume concentrates.
- From Wednesday to the following Tuesday the "current week" option goes through the whole steep end of its decay curve.
- On Tuesday itself, out-of-the-money Nifty weeklies can lose most of their remaining premium within hours, while at-the-money strikes swing sharply because gamma is at its highest.
- A holiday on a Tuesday pulls expiry forward to Monday, which shortens the week of decay.
Weekends and holidays
Calendar time passes over a weekend even though the market is shut. Models disagree about how to count non-trading days, and in practice option prices often adjust for the weekend before it happens, in the last sessions of the week. Do not expect a clean jump in value every Monday morning; the decay you see on a screen is the result of many traders' views about time and volatility, not a fixed schedule.
What time decay means for each side
| Option buyer | Option seller | |
|---|---|---|
| Theta | A daily cost | A daily income |
| Needs | A move large enough, soon enough, to beat decay and charges | The index to stay away from the strike |
| Near expiry | Cheap premiums, fast decay, high gamma | Fast income, but losses can grow quickly on a sharp move |
| Hidden risk | Losing the whole premium on many small bets | One large loss erasing many small gains |
Time decay is not free money
Sellers collect theta because they carry gamma and vega risk. The premium is the market's price for that risk; it is not an edge on its own. Margins for sellers are also far higher than the premium they receive.
Things that can outweigh theta
- A move in the index. Delta and gamma can easily dominate a day's theta, especially near expiry.
- A change in implied volatility. If IV rises sharply, an option can gain value even as a day passes; if IV falls after an event, it can lose more than its theta.
- Charges. For short-dated options with small premiums, brokerage, STT and exchange fees can be a meaningful share of the money at stake.
Examples use illustrative values, not current market data. This is general education, not investment advice.