Options
Time Decay — Definition & Example
The erosion of an option's premium as expiry approaches — measured by theta.
Time decay is the steady loss of an option's time value as expiry nears. It accelerates non-linearly: an option loses far more value in its final week than in any prior week. For OTM options, time decay is the primary determinant of value once direction is decided. Long option holders pay this decay; short option sellers collect it.
Example
NIFTY 24500 CE 14 days from expiry trades at ₹120. With NIFTY unchanged, the same option 7 days later might trade at ₹70 — losing ₹50 to theta. With 1 day left, it might be ₹15 even with NIFTY still unchanged.
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