Stock Market · Options Theory

Theta

Theta is the rate at which an option loses value every day, all else equal. It's the daily cost of holding an option. The toll the market extracts from option buyers for every passing day.

What theta means

Theta = daily option price decay (in rupees per share)

If an option has theta of −5, it loses approximately ₹5 in value each calendar day. Over a week: −₹35. Over a month: −₹150.

Where theta is highest

• ATM options have the highest absolute theta
• Theta accelerates as expiry approaches (non-linear decay)
• Deep ITM and deep OTM options have lower theta in absolute terms

> Theta decay is not linear. In the last 7 days before expiry, time value decays much faster than in the first 3 weeks of the option's life.

The chart

Time value decays slowly at first (30+ days to expiry), then accelerates dramatically in the final 2 weeks, becoming almost vertical in the last 3–5 days.

Last week before expirymost dangerous time for option buyers (fastest decay)

Same periodmost profitable time for option sellers (if market stays still)

Theta for buyers vs sellers

Option buyers: theta is a constant headwind. Every morning you wake up and the position is worth slightly less, even if the underlying hasn't moved.

Option sellers: theta is constant income. Sellers collect the decay. If the market stays still, premium melts away. All going to the seller.

This asymmetry is why many professional traders prefer selling options to buying them. Time is always on the seller's side.

Takeaway. Theta is the daily cost of holding an option. Time works against buyers and for sellers, and it accelerates near expiry. An option carrying a lot of time value with little time left to justify it is the most expensive shape a buyer can hold.