Theta Decay

Theta decay refers to the erosion of an option's time value as it approaches its expiry date, all else being equal. Every option's premium consists of two components—intrinsic value (the amount by which the option is in the money) and time value (reflecting the probability of the option gaining more value before expiry). Theta measures how much of this time value is lost each day. As expiry approaches, time value decays at an accelerating, non-linear rate—a phenomenon that benefits options sellers (who collect premium) and hurts options buyers (who paid for the premium). For Nifty and Bank Nifty weekly options traders in India, theta decay is particularly pronounced in the final two to three days before Thursday expiry, making option selling strategies especially attractive in low-volatility environments.