Part 7 Trading Master Class

Understanding Option Premium and Its Factors

The option premium is the price a trader pays to buy an option. It consists of two parts — intrinsic value and time value.

Intrinsic Value is the difference between the current price of the underlying asset and the strike price. For example, if a stock trades at ₹110 and the call strike is ₹100, the intrinsic value is ₹10.

Time Value reflects the potential for the option to gain more value before expiry. The longer the time to expiry and the higher the volatility, the greater the time value.
As expiry nears, time value decreases — a phenomenon known as time decay (theta). Understanding how premium behaves helps traders make better entry and exit decisions.