I have completed reading the book on options by zerodha. Let us say the theta is -6 and the premium is 11. Whether theta will reduce the option premium to 5 only on the next day? or the option premium will reduce 1 rupee per hour during the trading day? Suppose the theta is -2 for banknifty on Wednesday and the premium is Rs35. How this premium of Rs35 will become zero in the next day which is the expiry. What other factors will drive the premium to zero?
Theta is just one of the many factors working on options premium. If the theta is -2 and premium is 35, then all else kept equal, the premium reduces by 2 everyday. However, since there are many factors acting simultaneously on option premiums, you will not notice this happening. Some factors tend to increase the premium value and some tend to decrease it.
When we approach expiry, the effect of theta accentuates and one can attribute the reduction in premium to theta. I’d suggest you look at the Theta decay graph for this.
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I believe theta reduces option price at the end of the day …so effect you will see will be seen in next trading day when it opens.
To my understanding no it does not delay per minute or hour …like I said after 3.15 or 3.30 on that day it decays like Mutual fund NAV is declared at the end of day.
If I am wrong correct me.
There are so many variables at play behind Options pricing, not just theta. As for price decay, it is happening all the time throughout the day but the extent to which it happens depends on other variables, most importantly IV and Underlying price movement.
I understand price decay throughout the day but question was specifically for Theta and to my knowledge it does not change throughout the day…