Derivatives
Option premium
Option premium is the price of an option, paid by the buyer to the seller, made up of intrinsic value plus time value.
The premium is the market price of an option, quoted per unit. The buyer pays it and the seller receives it. The cost of one lot is the premium times the lot size. For a buyer, that amount is the most that can be lost on the trade.
Premium has two parts. Intrinsic value is what the option would be worth if it expired right now: for a call, the underlying price minus the strike, if positive; for a put, the strike minus the underlying price, if positive. Everything above that is time value, the amount the market pays for what might still happen before expiry. Out-of-the-money options are all time value.
Three things move the premium: the underlying price, the time left and implied volatility. Delta tells you roughly how much the premium changes for a one-point move in the underlying; an at-the-money option moves by about half a point. Time value shrinks every day. A rise in implied volatility lifts premiums and a fall deflates them, which is why premiums often drop right after a big event.
The common mistake is buying the cheapest premium. A ₹15 option far from the money needs a very large move before it gains, and most of them expire worthless. The other mistake is expecting the premium to follow the index point for point. A 100-point Nifty move does not add ₹100 to an at-the-money call.
Worked example
Splitting a premium into its two parts
Illustrative numbers. Bank Nifty is at 56,000. The 55,800 CE trades at ₹380: intrinsic value is 56,000 minus 55,800 = ₹200, so time value is ₹180. The 56,300 CE trades at ₹140. It is out of the money, so all ₹140 is time value. If Bank Nifty is still at 56,000 at expiry, the first is worth ₹200 and the second nothing. The first buyer loses ₹180 per unit, the second ₹140.
In WizeBuySell
WizeBuySell does not price options. It does not calculate intrinsic value, time value, delta or implied volatility, and it does not select a strike. It plots signals with entry, targets and a stop-loss from the price on the chart you apply it to. Which strike to buy and how much premium to risk are your decisions. A target distance on the index does not mean an equal move in the premium.