Understanding the Role of Time Decay in Options Trading
Do you own options contracts that are facing a drop in value? Is the value downfall even happening when the market is comparatively stable? Well, the reason behind this is time decay.
According to a SEBI report, Indian retail traders lost over 1.06 trillion rupees during FY-25 because of this time decay reason. Many of us fail to notice it, but this silent factor reduces the option’s price on a regular basis because of time decay.
Even in early 2025, the monthly average of options trading fell by 77%, highlighting the loss impacting the overall trading patterns. Having proper knowledge around options trading and time decay can be a key to saving your profits from turning into losses.
The Hidden Cost of Time
With every day passing by, a small part of the option’s value keeps going away. Regardless of whether the stock price remains the same or not, the slow loss of time decay happens.
In simple words, consider time decay as a melting ice cube that slowly keeps going away very quietly in the background.
Faster Decay During Expiry Week
During the final week before expiry, time decay starts catching up. For example, an option worth 12 rupees a week before can go down up to 2 or 3 rupees as well. Even though the stock is not moving, traders with short-term options can face this loss in the final days.
| Type | Typical Closing Price |
| In-the-Money (ITM) | Value ≈ intrinsic value |
| At-the-Money (ATM) | A few paise to ₹1 |
| Out-of-the-Money (OTM) | ₹0.05 (tick price) |
Why Time Decay Is Not the Same Every Day
Time decay trends usually start slowly and catch up with the expiry date as it gets closer. You will notice a slight drop in the value in the initial weeks, and the number gets bigger in the last ten days. Traders prefer to control the same in the early days when the control is in their hands.
How Strike Price Affects Time Decay
Time decay has a different impact on different kinds of options. For instance, at-the-money options (closer to the current market value) have the maximum value drop. On the other hand, the options above or below the market price, such as ITM (In-The-Money) and OTM (Out-Of-The-Money) options, lose value very slowly.
Traders Who Benefit From Time Decay
Time decay can be a helping hand for option sellers. They can get the premium right after selling it. When time passes, options premium erosion reduces the price, allowing sellers to buy back the low-value options and make a profit. Experienced traders often plan this around the expiry cycle to get the best results.
Managing Time Decay for Buyers
If not managed properly, time decay can be a serious concern for option traders. While your heavy premium doesn’t ensure that the market goes in your favor, OTM theta decay can still eat into your position.
In the waiting time, options premium erosion continues as the expiry cycle moves closer to the end. The best approach can be to manage the time decay in the initial stages when it can be controlled.
Time Decay and Volatility Together
Like time decay, market volatility matters a lot in reducing the price of an option’s trading. With passing time and volatility, the value can have a significant drop along with time decay. You should assess the volatility levels and time decay before making a trade.
Planning Trades With Time Decay in Mind
Planning your trading with time decay requires smartness and knowledge. You should assess when to enter, when to exit, and when value loss can happen with time.
In the case of buying options, the ideal time is to start early in the expiry month. On the other hand, the latter part of the cycle is much better, as time decay speeds up and remains in your favor.
Conclusion
Hence, time decay might be a silent aspect, but it can impact your profits greatly. You should keep an eye on the profit loss due to time decay to use it to your advantage.
Keep checking out other such informative and insightful blogs on StockYaari. Stay updated with the trends to trade with peace of mind and confidence.
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This analysis is for informational purposes only. Please consult a SEBI-registered financial advisor before investing.
– Chandan Pathak
Equity Research Analyst, StockYaari