Option Premium
The Option Premium is the upfront price the option buyer pays to the seller (writer) to obtain the contractual right. It has two components: intrinsic value (how much the option is already in-the-money) and time value (the optionality of moves before
The Option Premium is the upfront price the option buyer pays to the seller (writer) to obtain the contractual right. It has two components: intrinsic value (how much the option is already in-the-money) and time value (the optionality of moves before expiry).
Plain-English example
HDFCBANK spot = ₹1,650. The 1,700 Call expiring in 30 days trades at ₹28. Intrinsic value = max(1,650 − 1,700, 0) = 0. Time value = ₹28 − 0 = ₹28. The entire premium is time value. If 20 days pass and HDFCBANK is still at ₹1,650, the same call may decay to ₹8 even though spot is unchanged — that's theta at work.
What drives premium
- Spot vs strike distance (intrinsic value)
- Time to expiry (more time = more premium)
- Implied Volatility (higher IV = higher premium)
- Risk-free rate (small effect)
- Dividends expected before expiry
When it matters
Premium = max loss for a buyer, max gain for a seller. Comparing premium to potential payoff = expected-value check.
SEBI caveat
Options premium movement is non-linear (gamma, vega). Past premium behaviour is not predictive. Educational only.