Encyclopedia5 min read
Option Premium Explained: Intrinsic + Extrinsic Value
What you pay per contract — intrinsic value, time value, and what erodes into expiry.
Premium Components
Premium = intrinsic value (if ITM) + extrinsic (time + volatility). OTM options are all extrinsic — vulnerable to theta and IV crush.
ITM options carry intrinsic + extrinsic — higher delta but more capital.
Decay
See intrinsic value deep dive.
Frequently Asked Questions
- Who is this guide for?
- Nifty and Bank Nifty option traders who want structured education around chain reading, OI, and risk — not signal tips.
- Can I trade from this article alone?
- Use it as education paired with live analysis on OptionTools. Paper trade or size down while validating ideas.
Key Takeaways
- Extrinsic value is what you lose if wrong or slow.
- OTM = pure extrinsic bet on move + time.
- Premium is not 'cheap' — check IV and delta.
Related Articles
- Intrinsic Value in OptionsThe in-the-money portion of premium — how it behaves for calls and puts on Nifty.
- Time Decay in Options (Theta Effect)How options lose value as expiry approaches — acceleration on weekly Nifty contracts.
- Theta: Time Decay in OptionsTheta erodes option premium daily — the hidden cost of buying Nifty and Bank Nifty options, especially in expiry week.