S&P BSE Sensex Index
Education

Part 3 Learn Institutional Trading

30
Option Pricing & Premiums

The premium (price of option) is determined by many factors:

Intrinsic Value – Difference between current stock price and strike price. Example: If stock = ₹200, strike = ₹180 (call), intrinsic value = ₹20.

Time Value – Extra premium because of time left until expiry. More time = higher premium.

Volatility – Higher volatility increases premium (uncertainty = higher value).

Interest rates & dividends – Also affect option pricing slightly.

The most famous model for pricing options is the Black-Scholes Model, used worldwide.

Moneyness (ITM, ATM, OTM)

Options are classified as:

In The Money (ITM): Option already has intrinsic value. (Example: Stock = ₹250, Call strike = ₹240).

At The Money (ATM): Stock price = strike price.

Out of The Money (OTM): Option has no intrinsic value yet. (Example: Stock = ₹250, Call strike = ₹280).

OTM options are cheaper, but riskier. ITM options are costlier, but safer.

Disclaimer

The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.