Strikes, premium, expiry, intrinsic and time value — the concepts that determine whether an option position makes sense.
Key takeaways
- An option's price is intrinsic value plus time value; time value decays to zero at expiry.
- Buyers have limited loss and low probability; sellers have high probability and open-ended risk without hedges.
- Direction alone is not enough — you also need to be right about time and volatility.
An option is a contract giving the right, not the obligation, to buy (call) or sell (put) an underlying at a chosen strike before expiry. The buyer pays premium; the seller receives it and takes on the obligation.
Premium has two components. Intrinsic value is how far the option is in the money right now. Everything else is time value, which reflects how much can still happen before expiry. Time value decays every day and collapses fastest in the final sessions — the single most important fact for a weekly-expiry market like India's.
This is why buyers lose despite being right on direction. If the index moves your way slowly, decay can outrun the delta gain. Buying works best when you expect a fast, large move, and worst when you expect a grind.
Selling flips the profile: high probability of small gains, low probability of large losses. Naked short options have theoretically open-ended risk, which is why disciplined sellers hedge the far wing and cap the worst case before entering, rather than reacting to it at 2:30 PM.
Before any options trade, answer three questions: which direction, by when, and what happens to my position if implied volatility rises 20%. If any answer is missing, the trade is a guess with extra steps.
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