Option Premium
Option premium is the price paid by the buyer to the seller for the rights conveyed by an options contract. The premium on NSE-traded Nifty and Bank Nifty options fluctuates continuously during market hours based on changes in the underlying price, time remaining, and implied volatility.
The option premium represents the total cost of the contract and is composed of two parts: intrinsic value and time value. Intrinsic value is the immediate exercise value of the option — it exists only for in-the-money options. Time value is the additional amount the market is willing to pay above intrinsic value, reflecting the possibility that the option could move further in the money before expiry.
Premiums on NSE are quoted per unit of the underlying. Since each Nifty options contract covered 25 units (prior to lot size revisions), a premium of ₹100 per unit translated to a total outlay of ₹2,500 per lot. This calculation is fundamental to understanding the actual capital at risk for any options position.
Premium levels are heavily influenced by implied volatility. When market participants anticipated large moves — around the Union Budget, RBI policy meetings, or general election results — premiums on Nifty and Bank Nifty options expanded significantly, reflecting elevated uncertainty. After the event passed, premiums often contracted sharply even if the underlying moved substantially, because the uncertainty had been resolved.
A common error among new options participants is focusing on the rupee premium rather than the percentage of the underlying it represents. A ₹50 premium on a Nifty 18,000 call represents approximately 0.28% of the underlying. Whether that is expensive or cheap depends on historical and implied volatility levels, not on the absolute rupee figure.
Option writers receive the premium upfront and must post margin with the exchange. If the position moves against the writer and the mark-to-market loss exceeds the available margin, a margin call is issued. Failure to meet margin calls results in forced square-off of the position by the broker, a risk that all option writers must manage proactively. The premium received is not profit until expiry; it is a liability until the contract is closed or expires worthless.