Time Decay Explained — Why Options Lose Value Daily



Many traders especially newbies believe, buying options will make them rich, yeah true to a extent of 1%, but 99% time Options Buyers lose money.

Even SEBI research shows 90-95% Options traders lose money due to the fact that they think buying options will make them richer like Warren Buffet, Rakesh Jhunjhunwala etc., but believe it or not Options are meant to be a hedging tool for long-term investors.

To explain when Option buyers lose money, we will understand the important Greek-Theta or Time-Decay concept.
 
Time decay (Theta) is one of the most misunderstood aspects of options trading. It’s what separates winners from impatient traders.

What is Time Decay?

  • Every option loses value daily as expiry approaches, even if the stock doesn’t move.

  • This erosion of extrinsic value is called Theta decay.

Buyers vs Sellers

  • Buyers: Risk losing premium if the market doesn’t move fast enough. Winning is 33% probability

  • Sellers: Profit from decay if the option expires worthless. Winning is 67% probability

How Time Decay Works

  • Far from expiry → slow decay

  • Near expiry → rapid decay

Example: 1 month to expiry → loses ₹2/day; 1 week to expiry → loses ₹10/day. So only expiry trading has become famous in India. NSE is the leader in F&O which had 99.99% market share in F&O, later BSE entered to F&O and grabbed 35-45% market share from NSE in quick-time and it reflected in BSE's share price.

Trading Tips

  1. Avoid buying OTM options near expiry unless expecting huge volatility.

  2. Sellers can use Theta to their advantage with spreads or covered calls.

  3. Track Theta alongside Delta and Vega — they interact.

🎯 Key Takeaway:

Time is money in options — literally. Understanding Theta ensures you plan trades according to timing, not just direction.