Options
Premium — Definition & Example
The market price of an option — what the buyer pays the seller for the contract.
The premium is the option's current market price, composed of intrinsic value (if any) plus time value. Premium reflects the market's probability-weighted expectation of where the underlying will go before expiry. Implied volatility, time-to-expiry, distance to strike, and interest rates all contribute. As expiry nears and the underlying remains static, premium decays toward intrinsic value (toward zero for OTM options).
Example
NIFTY 24500 CE trades at ₹120 premium with NIFTY at 24450. Intrinsic value = max(0, 24450 − 24500) = ₹0. Time value = 120 − 0 = ₹120. The entire premium is time value; the option is OTM.
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