Time Decay Options

Options traders in India often focus on price movement while overlooking how time itself impacts profitability. Even if the market doesn’t move, an option can lose value every single day. That’s where time decay options come into play.

Time decay is a foundational concept every future & options trader should understand, as it directly influences option premiums regardless of market direction.

In this blog, we’ll break down what time decay in options means, how it affects option pricing, who benefits from it, and common mistakes Indian traders make.

What Is Time Decay in Options?

Time decay refers to the gradual reduction in an option’s value as it moves closer to its expiry date. As time passes, the probability of an option becoming profitable decreases, and the option’s price reflects that loss of opportunity.

This decay primarily affects the time value, also called extrinsic value, of an option. Hence, time decay is often referred to as option time value decay.

In India, where traders actively participate in NIFTY, BANKNIFTY, FINNIFTY, and stock options, time decay is a daily and unavoidable reality.

Option Time Decay Formula (Theta Explained)

Time decay is measured using Theta, one of the key option Greeks.

Conceptual Option Time Decay Formula:

Theta = Change in option premium ÷ Change in time (one day)

If an option has a Theta of -15, it means the option’s premium reduces by approximately ₹15 per day, assuming all other factors remain constant.

Note: Theta is always negative for an option contract. For option sellers, the position Theta becomes positive because they are short a negative number, which results in a net gain.

Reality Check: Time Decay Is Continuous

Many traders assume that Theta decay happens only at the end of the trading day. In reality, option premiums in the Indian market lose time value continuously.

1. During Market Hours (9:15 AM – 3:30 PM):

• Time value erodes minute by minute.
• If the underlying index remains unchanged for several hours, the option premium typically declines.

2. During Low-Volatility Periods:

When the market trades sideways, commonly observed during mid-day sessions, option buyers continue to lose value due to time decay, even without price movement.

3. Outside Market Hours:

Option prices also reflect the passage of time overnight, on weekends, and during holidays. This is why option premiums often soften toward the end of the trading week.

How Time Decay Works in Options (The Non-Linear Theta Curve)?

Time decay in options does not happen evenly over time. This is one of the most misunderstood aspects of options trading for beginners. Instead of declining at a constant rate, option value follows a non-linear Theta curve.

A simple way to visualise this curve is in three phases:

1. Far From Expiry: Slow and Gradual Decay - When an option has 30 to 60 days or more left until expiry, time decay works very slowly.

• Daily premium loss is relatively small
• Options feel “stable” during this phase
• Buyers have enough time for the market to move in their favour

This is why longer-dated or monthly options are often preferred for positional or swing trades.

2. Midway to Expiry: Noticeable Acceleration - As expiry comes closer, time decay starts becoming more visible.

• Premium erosion increases day by day
• At-the-Money (ATM) options begin losing value faster
• Sideways markets start hurting option buyers

At this stage, traders begin to feel the impact of Theta, especially in weekly contracts.

3. Last 7 Days: The “Crashing Wave” Effect - In the final week before expiry, time decelerates sharply.

• Theta increases exponentially
• Even a few hours of no movement can cause sharp premium drops
• Out-of-the-Money (OTM) options are most vulnerable

This phase is best described as a crashing wave rather than a slow leak. In India’s weekly expiry system, this is why option premiums can collapse rapidly, sometimes within minutes.

Why This Matters for Indian Traders?

Because the Indian market has weekly expiries, most retail traders are exposed to the steepest part of the Theta curve far more often than traders in monthly-only markets.

Understanding this non-linear behaviour helps traders:

• Choose the right expiry
• Avoid late-entry option buying
• Align strategies with time decay instead of fighting it

In short, time is not neutral in options trading; it accelerates against you as expiry approaches.

The Weekend Effect: Time Decay Never Stops

A common shock for beginners is seeing option premiums fall sharply on Monday morning, even when the market hasn’t moved much. The decay doesn't just "show up" on Monday morning. Professional traders often sell IV (Implied Volatility) on Friday afternoon, causing premiums to drop before the weekend even starts. If you buy on Monday morning, you might find premiums "crushed" even if the market is flat, because the "time risk" for the weekend has already been removed from the price.

Why does this happen?

• Time decay runs 365 days a year, not just on trading days
• The decay for Saturday and Sunday is usually priced in by Friday evening

In simple terms, you are paying “rent” for holding an option, even when markets are closed.

How Does Time Decay Affect Options Pricing?

Time decay reduces only the extrinsic (time) value of an option, not its intrinsic value. As expiry approaches, this extrinsic value erodes faster, directly impacting the option premium.

Two Components of Option Price

• Intrinsic Value: Real, in-the-money value (does not decay)
• Extrinsic Value (Time Value): Value from remaining time and volatility (decays daily)

Note: Time decay works only on extrinsic value.

How Time Decay Impacts Different Option Types?

1. Out-of-the-Money (OTM) Options:

• The entire premium is extrinsic value
• Decays the fastest
• Most likely to expire worthless

2. At-the-Money (ATM) Options:

• Have the highest Theta
• Lose value rapidly as expiry approaches
• Most sensitive to time decay

3. In-the-Money (ITM) Options:

• A large part of the premium is intrinsic value
• Decay slower compared to ATM and OTM options
• Often feel “stiff” because time decay has less impact

This is why deep ITM options hold value better, while OTM options collapse quickly near expiry.

Why Options Can Lose Value Even When the Market Is Flat?

Many beginners are confused when their option loses money despite the index staying at the same level.

This happens because:

• Time keeps passing
• The probability of a profitable move keeps shrinking
• The option’s extrinsic value reduces every day

In the Indian market, especially with weekly expiries, this effect is magnified.

Time Decay vs Volatility: An Important Balance

While time decay continuously pulls option prices down, Implied Volatility (IV) can push them up.

• Rising IV (often seen during events or uncertainty) can temporarily offset time decay
• Falling IV can accelerate losses, especially for option buyers

This is why professional traders always remember: Option prices move due to both time decay and volatility - not time alone.

Why Do Traders Still Buy Options? (Theta vs Gamma)

A natural beginner question is: “If Theta is so damaging, why buy options at all?”

The answer lies in Gamma. Option buyers lose on Theta. But they gain on Gamma, which represents explosive price movement

When the market moves sharply and quickly, Gamma can overpower Theta, leading to outsized gains. This balance explains why both option buyers and sellers coexist in the future & options market.

Option Buyer vs Option Seller: Who Benefits From Time Decay?

The following comparison helps beginners choose strategies aligned with their risk appetite:

Example of Time Decay in the Indian Market

Consider:

• You buy a NIFTY 22,000 Call Option
• Premium paid: ₹120
• Theta: -15
• Lot size: 65

If NIFTY stays exactly at 22,000 for 24 hours:

New Premium = ₹120 − 15 = ₹105

Loss per option: ₹15

Actual loss = ₹15 × 65 = ₹975

You lost ₹780 just for holding the position for one day, without any price movement.

You lost ₹975 simply due to time decay, even though the index did not move. Note: Lot sizes are periodically revised by NSE. Always check the latest circulars before calculating risk.

Why Lot Size Matters More Than Beginners Think?

In India, options are traded in lots, not single units. This means the rupee impact of Theta is magnified by the lot size.

For example: Actual Rupee Impact = Theta × Lot Size

Because lot sizes change from time to time, NSE periodically issues circulars to keep contract values within a defined band (typically ₹15–20 lakhs).

Note: Traders should note that the National Stock Exchange (NSE) has revised the lot sizes for major index derivatives effective from the January 2026 series. This revision follows SEBI’s guidelines to maintain a contract value between ₹15 Lakhs and ₹20 Lakhs.

Always confirm current lot sizes directly from NSE before entering trades, as they are subject to revision.

Pro Tip: Weekly Expiry Reality in the Indian Market

India’s weekly expiries make time decay extremely aggressive.

Expiry-Day Warning:

On Thursday (NIFTY / BANKNIFTY expiry):-

• Theta reaches maximum velocity
• OTM options can drop from ₹20 to ₹0 in minutes
• This can happen even if the index remains flat

Common Mistakes Traders Make With Time Decay

Many option losses happen not because the market moves against the trader, but because time decay is underestimated. These are the most common mistakes beginners make.

1. Buying Options Too Close to Expiry:

Weekly options lose value extremely fast due to high Theta. Even if the market moves slightly in your favour, time decay can erase profits within hours.

Alternative: Choose monthly expiries when you expect a directional move, as they provide more time and reduce Theta pressure.

2. Holding Losing Trades Hoping Time Will Help:

Time always works against option buyers. Waiting for a recovery only increases decay, especially during the last few days before expiry.

Alternative: Set a time-based exit. If the expected move doesn’t happen within a fixed period, exit early to limit decay damage.

3. Ignoring Lot Size When Calculating Risk:

Theta is quoted per unit, but options in India are traded in lots. Many traders underestimate losses by not multiplying Theta by the lot size.

Alternative: Always calculate risk in rupees by multiplying Theta by the lot size before entering the trade.

4. Overtrading Weekly Expiries:

Weekly options sit on the steepest part of the Theta curve. Frequent trading in these contracts during sideways markets often leads to consistent small losses.

Alternative: Use weekly options selectively, prefer selling strategies or short-duration trades aligned with rapid decay.

5. Forgetting the Weekend Effect:

Time decay continues even when markets are closed. Weekend decay is priced in by Friday, which is why option premiums often drop sharply on Monday.

Alternative: Avoid carrying short-term option buys over the weekend unless a strong gap or event is expected.

6. Ignoring Changes in Volatility:

Option prices are affected by both time decay and implied volatility. Falling volatility can accelerate losses, while rising volatility can temporarily mask Theta decay.

Alternative: Check Implied Volatility before entering a trade and avoid buying options when IV is already elevated.

Conclusion

Time decay is unavoidable in options trading, but once understood, it becomes predictable. Whether you’re buying options for directional trades or selling them to benefit from Theta, mastering time decay options is essential.

A solid grasp of time decay allows traders in the futures and options segment to manage risk better, structure smarter trades, and operate more confidently through their Demat account.

FAQs

1. Does time decay impact both buyers and sellers of options equally?

No. Time decay negatively impacts buyers, while sellers benefit as premiums erode with time.

2. How does time to expiration affect the magnitude of time decay?

The closer an option is to expiry, the faster the decay. Weekly options experience far more aggressive decay than monthly options.

Disclaimer: The information provided in this blog post regarding options trading, time decay, and the Indian stock market is for educational and informational purposes only. It should not be considered as financial advice, a recommendation to buy or sell securities, or an offer to participate in any specific trading strategy.