Options Premium

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The price an Option buyer pays or an Option seller receives is called the premium of an Option.

Options premium is the price option buyer must pay to the options seller (or writer) for an option contract.

For example:

Infosys current market price (Spot Price) is Rs 1100. The sellers of an option contact for strike price Rs 1200 is asking for the premium of Rs 20. This Rs 20 is options premium.

In below options chain, the options premium can be found under colums LTP (Last Traded Price). A seprate options premium is quoted for Call & Put Options

Options premium is derived from 2 values:

Options premium = Intrinsic Value + Time Value

  1. Intrinsic Value - The Intrinsic value is the amount by which the strike price of an option is In-the-money. For call option, the Intrinsic value is the underlying stock price minus its call strike price. For the put option, the Intrinsic value is the put strike price minus the underlying stock price. Note that ATM and OTM options don't have any Intrinsic value.
    • For Call Options: Intrinsic Value = Current Market Price - Strike Price
    • For put options: Intrinsic Value = Strike Price - Current Market Price

    Note: If Intrinsic Value comes in -ve, they are considered as 0.

  2. Time Value (or Extrinsic Value) - The value of the remaining days until the options contract expires. The Time value decreases to zero over time as the option moves closer to expiration. Higher time value (longer time to expiry) results in to higher premium.
Option Premium Calculation
  ITM ATM OTM
Intrinsic Value YES NO NO
Time Value YES YES YES
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