Forensics: NIFTY Options – Theta(θ) Decay

The most intuitive option greek is theta (θ) – a measurement of the option’s time decay. Theta measures the rate at which options lose their time value, as the expiration date draws nearer. It is usually expressed as a negative number.

Simply put, theta of an option reflects the amount by which the option’s value will decrease every day.

Time and Theta

  1. Longer term options have theta of almost 0 as they do not lose value on a daily basis.
  2. Theta is higher for shorter term options.
  3. Theta is higher for at-the-money options.
  4. Theta changes at an exponential rate. It goes up dramatically as options near expiration as time decay is at its greatest during that period.

Theta decay in action: March 2014 NIFTY Options Since Jan

First, lets look at the underlying:


To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.

θ of Calls:

March 2014 NIFTY Theta (CE)

θ of Puts:

March 2014 NIFTY Theta (PE)

Does it mean that you should go out and sell the heck out of every option you can find close to expiry?
No! As expiration gets closer, the risk posed by extreme amounts of gamma outweighs the theta you’re collecting.
Stay tuned for more.

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