Theta
Theta measures the rate at which an option loses value as time passes, all else being equal. On NSE, theta accelerates in the final week before Nifty and Bank Nifty options expiry, making time decay a central risk for option buyers holding positions through expiry.
Theta is expressed as the rupee (or point) amount an option loses per day from time decay alone. A Nifty ATM option with a theta of -10 would lose approximately ₹10 per unit per calendar day, or ₹250 per lot, solely from the passage of time. Over a weekend, this translates to approximately three days of theta decay hitting the position value at the Monday open.
The relationship between theta and gamma is fundamental to understanding the options market. Options with high positive gamma — primarily short-dated ATM options — have the highest theta. The buyer of such options pays a high daily rate of time decay in exchange for the potential of large gamma-driven profits from a significant move. Option writers collect this theta but carry the gamma risk.
Theta decay is not linear. It follows a curve that accelerates as expiry approaches. For an option with 30 days to expiry, daily theta may be modest. With 7 days remaining, the daily decay can be several times larger. With 1–2 days remaining, as seen in the final session of NSE weekly expiries, theta becomes extremely large for ATM options, and even a half-session of time can erode substantial premium.
The practical implication for NSE participants was that holding long ATM options into the final days of weekly expiry was a high-cost strategy unless a significant move occurred. Strategies such as buying overnight ATM options and holding them for a single session's move were subject to the full overnight theta charge, which could be meaningful relative to the potential premium movement from a typical intraday range.
A misconception is that theta only matters for option buyers. Option writers benefit from theta — it works in their favour — but they are exposed to gamma risk. A writer who collects theta but fails to manage the gamma exposure around large moves could sustain losses that far exceed accumulated theta income. The net profitability of theta-collecting strategies depends on the balance between theta collected and losses from adverse gamma exposure.