Decoding the Option Premium

Why is an option priced at ₹150? Why did it drop to ₹140 even though the market didn't move? The price is not random. It's math.

1. Intrinsic Value (Real Value)

This is the "real" tangible value of the option if it expired right now.

• Calculation: Difference between Spot Price and Strike Price.
• OTM Options: Have ZERO Intrinsic Value.
• ITM Options: Have Positive Intrinsic Value.

2. Time Value (Hope Value)

This is the extra amount you pay for the time remaining until expiry.

• Also called "Extrinsic Value".
• It represents the probability that the option might become profitable before it expires.
• Theta Decay eats this value every single second.

Example

Nifty Spot: 22,000
Strike: 21,900 CE (Call Option)
Current Premium: ₹150

If Nifty stays at 22,000 until expiry, this option will expire at ₹100. The ₹50 Time Value will vanish (profit for the seller).