Part 4 Trading Master Class

Options Premium – How Price is Decided?

The premium (cost of option) depends on:

Intrinsic Value → The real value of option (difference between current price & strike price).

Time Value → More time till expiry = higher premium.

Volatility → If market is volatile, premium is high because chances of big move increase.

Interest Rates & Dividends → Minor effect.

👉 Example:

Reliance = ₹2,600.

Call Option 2,500 Strike = Intrinsic Value = ₹100.

Premium charged = ₹120 (extra ₹20 is time value).

Moneyness of Options

Options are classified as:

In the Money (ITM) → Option already has profit potential.

At the Money (ATM) → Option strike = Current price.

Out of the Money (OTM) → Option has no intrinsic value (only time value).

👉 Example (Stock at ₹500):

Call 480 = ITM.

Call 500 = ATM.

Call 520 = OTM.