Definition
Premium Decay
Premium decay is the steady erosion of an option's time value as it approaches expiry, driven by theta.
Every day that passes, an option loses a little time value even if the underlying does not move — this is premium decay. It accelerates sharply in the final days, which is why an out-of-the-money Nifty weekly option can lose most of its value in the last 48 hours before expiry.
This decay is the option seller's profit engine: writers on the NSE collect premium and let theta work for them, especially on the weekly expiry where decay is fastest. Buyers fight against it and need a quick, decisive move to overcome the daily bleed.
Related terms
- Intrinsic Value vs Time ValueAn option's premium splits into intrinsic value (the real in-the-money amount) and time value (everything else).
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.