An option is a wasting asset, in the sense that the time value of the option tends towards zero as expiry approaches. This time decay is also referred to as Theta. Let us look at the time value of an OTM 10,000 Nifty Call for the month August 2017. Check out the chart belowâ€¦

Data Source: NSE

Since the 10,000 Nifty Call Option is OTM the entire premium value of the option is in the form of time value. We can see the time value diminishing from Rs.209.50 to Rs.2.30 over the span of one month. Had you sold this call options in the beginning of the month, this entire fall would have been your profit. On the other hand, had you bought these options, the entire premium would have been lost, if you had not triggered your stop loss earlier.

Two of the most important components of time value are time and volatility. Higher the time to expiry higher will be the time value both for call options and put options. Even if the option is still OTM, an increase in volatility can also bring about an increase in time value. While the buyer of the option bets on volatility pushing up time value higher, the seller of the option will hope for the time value of the option to work in his favour so that the option eventually expires worthless. This forms the basic premise of options trading!

An option is a wasting asset, in the sense that the time value of the option tends towards zero as expiry approaches. This time decay is also referred to as Theta. Let us look at the time value of an OTM 10,000 Nifty Call for the month August 2017. Check out the chart belowâ€¦

Data Source: NSESince the 10,000 Nifty Call Option is OTM the entire premium value of the option is in the form of time value. We can see the time value diminishing from Rs.209.50 to Rs.2.30 over the span of one month. Had you sold this call options in the beginning of the month, this entire fall would have been your profit. On the other hand, had you bought these options, the entire premium would have been lost, if you had not triggered your stop loss earlier.

Two of the most important components of time value are time and volatility. Higher the time to expiry higher will be the time value both for call options and put options. Even if the option is still OTM, an increase in volatility can also bring about an increase in time value. While the buyer of the option bets on volatility pushing up time value higher, the seller of the option will hope for the time value of the option to work in his favour so that the option eventually expires worthless. This forms the basic premise of options trading!