Part 12 Trading Master Class

Option Premium and Its Components

The premium is the price you pay to buy an option. Premium has two parts:

A. Intrinsic Value

The real value of the option.

Example:
If Nifty is at 22,000 and you have a Call option of 21,800
Intrinsic value = 22,000 – 21,800 = 200 points

B. Time Value

The extra value due to remaining time to expiry.

As expiry nears, time value decays, and premium falls. This is called Theta Decay.