What you are actually buying
An option is not a cheaper share. This track is what the difference is made of.
What this track is for
An combines and . The strike sets the payoff. Time passes even when the market stands still. As uncertainty resolves, time value falls. Work through each factor, the move needed to break even and what happens at expiry.
Steps9Each says why it follows the last
You will be able to7Things to read and recognise
Comes afterOpen interest: the four-cell mapRead that track first
The track, in order
9- Futures vs Options: The Contract Before the PayoffStart with the contract, not the payoff. One side takes an obligation. The other buys a right. And margin is not a loss limit for either.A futures contract binds both sides. The buyer gains exactly what the seller loses, in either direction, and the contract puts no floor under either of them. An option splits that in two. The buyer pays a premium for a right, and can walk away from it. The seller takes the premium and keeps the obligation. Margin is a deposit that backs an obligation. It is not a cap on what a position can cost.
- What an Option Premium Is Made Of: Intrinsic Value and Time ValueNow look at what the price IS. A premium is two different things added together. Almost every later surprise comes from treating them as one.An option's premium is two different things added together. Intrinsic value is what the option would be worth if it expired right now. That is pure arithmetic on the strike and the current level, and never less than zero. Time value is everything else: the amount paid for the chance that the underlying moves further before expiry. Intrinsic value moves only when the underlying moves. Time value shrinks every day regardless, and is exactly zero at expiry.
- Moneyness: What In, At and Out of the Money Actually MeanThen the level everything is measured from. In, at and out of the money are not ratings. They say how much of the premium is real value, and how much is a bet.Moneyness describes where a strike sits against the current level of the underlying. A call is in the money when the level is above its strike. It is at the money when the two are roughly equal, and out of the money below it. For a put, all of that reverses. The label is not a quality rating. It says how much of the premium is intrinsic value, and how much is a bet on movement, nothing more.
- Delta: Why the Index Moved and the Option Barely DidThe question people arrive with. The index went up and the option barely moved. The strike decides what fraction of a move gets paid out.Delta is the fraction of the underlying's move that an option's premium picks up. An at-the-money option has a delta near 0.5. A 100-point move in the index then moves its premium by roughly 50 points. A far out-of-the-money option can have a delta of 0.1 or less, so the same 100 points moves it about 10. Being right about direction is not enough. The strike decides how much of that being right is paid out.
- Expiry Theta Trap: How Option Premium DecaysThe clock, on its own. Watch a premium decay on an underlying that does nothing at all. The cost of being right but late becomes a number.Theta is time decay. Part of an option's premium is time value, and that part erodes as expiry approaches. When the underlying sits roughly still, the time value bleeds away. The bleed often speeds up in the final sessions. A buyer can be right on a direction-neutral view and still lose premium.
- Volatility Crush: The Event Happened and the Premium Still FellTime is not the only thing being paid for. Here the event lands and the move goes the right way. The premium still falls, because the uncertainty it was priced for is gone.Before a known, dated event, option premiums carry extra time value, because nobody knows what the event will produce. Once it produces something, that uncertainty is gone. The premium loses the part of its value that was being paid for not knowing. This is called a volatility crush. It can leave a holder worse off even when the underlying moved the way they expected, because the move was smaller than the premium had already priced.
- Option Greeks: The Four Sensitivities and the Units They Are Quoted InYou have met delta, theta and a volatility collapse one at a time. This is the map of all four sensitivities. More useful still, it is a map of their units.The Greeks are four sensitivities of an option's model price. The underlying is the share or index behind the option. Delta is the change in the premium for each ₹1 the underlying moves. Gamma is the change in delta for that same ₹1. Theta is the change for each day, on a stated time convention. Vega is the change per one percentage point of implied volatility. Each is measured where the option is now, and none forecasts anything.
- Breakeven: How Far the Underlying Has to Move Before You Are EvenPut the three together and one number falls out. It is the level the underlying has to reach before any of this returns what it cost.Buying a call does not turn a profit the moment the underlying rises. It turns even only once the underlying clears the strike by the premium that was paid. Even then, the charges on both legs have to be covered first. On a 20,000 call bought for ₹85, the underlying has to reach roughly 20,085 to return the premium, and a little beyond that to cover the charges. Everything below that line is a smaller loss, not a gain.
- Expiry Week: Open Interest Falling in One Series and Building in the NextClose where the contract does. Open interest drains from an expiring series and rebuilds in the next one. Read only the first half and you get the opposite of what happened.In the days before a derivatives expiry, open interest in the expiring series falls to almost nothing. Every contract either settles or is closed. Much of it does not disappear. It reappears as fresh open interest in the next series, as holders move a position forward. That movement is called rollover. Reading the fall in the expiring series alone says positions are being abandoned. Reading both series together often says the opposite.
When you finish this track
Intrinsic Value
Intrinsic value is the part of an option's premium that would survive if the contract expired at this instant.
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Time value is the part of an option's premium that is left after intrinsic value is taken out.
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