Derivatives and advanced market conceptsModule 1, lesson 5 of 21
Strike prices, premiums and expiry
How option strikes and expiries are listed, what the premium pays for, how contract value is worked out, and why a cheap premium is not a cheap trade.
In this lesson
- Read an option quote showing underlying, expiry, strike, type and premium.
- Calculate the premium paid and the contract value for an option position.
- Explain what determines how much an option premium costs.
- Explain why a very cheap premium usually reflects a low chance of profit.
Builds on
- Call and put optionsThis lesson builds on the definitions of calls, puts and premiums.
On this page
In simple terms
An option quote packs a lot of information into a short line. A made-up example: "XYZ, expiry 28th, 1,050 call, premium ₹18". That means an option on XYZ shares, expiring on the 28th of the month, giving the right to buy at ₹1,050, costing ₹18 per share.
Reading an option
| Part | Meaning |
|---|---|
| Underlying | The share or index the option is based on |
| Expiry | The last day the option exists |
| Strike | The price at which the buyer may buy (call) or sell (put) |
| Type | Call or put |
| Premium | The price of the option, per unit of the underlying |
Exchanges publish all available strikes and expiries for an underlying in a table often called the option chain.
Strikes and expiries
Exchanges list many strikes, at regular intervals above and below the current price, and several expiries. Which expiries exist, and how often, has changed over time under exchange and SEBI rules. Short expiries, only days away, are especially risky because there is so little time for a position to recover, as the derivative risks lesson explains.
Premium paid and contract value
Worked example: A made-up option position
Call option, strike ₹1,050, premium ₹18, lot size (made up) 500 shares, share price ₹1,000.
| Premium paid: 18 × 500 | ₹9,000 |
|---|---|
| Contract value at the strike: 1,050 × 500 | ₹5,25,000 |
For ₹9,000, the buyer controls a position worth over ₹5 lakh. That is the leverage built into options, as the leverage lesson explains.
What the premium pays for
The premium is higher when:
- The strike is closer to, or better than, the current price, because the option is more likely to pay off, as the intrinsic and time value lesson explains.
- More time is left, because there is more chance of a large move.
- Expected volatility is higher, because big moves are more likely, as the volatility lesson explains.
Cheap is not good value
Very cheap options attract many new traders: "only ₹2 a share". But a premium is cheap for a reason.
Worked example: A made-up cheap call
A share trades at ₹1,000. A call with a strike of ₹1,200 expiring in a week costs ₹2.
| Breakeven at expiry: 1,200 + 2 | ₹1,202 |
|---|---|
| Rise needed from ₹1,000 | about 20.2% in a week |
| Premium paid on a lot of 500 | ₹1,000 |
If the share rises 10%, a big move for a week, the option still expires worthless. Most of the time, the whole ₹1,000 is lost. The occasional large win does not make up for frequent total losses unless the price was too low, and markets rarely price options that generously.
The question is never "is this option cheap?" but "is the chance of profit worth the price?", an expected value question.
Why it matters
Understanding what an option quote means, how much money is really at stake, and why cheap premiums are cheap protects against the most common beginner mistakes in options.
Limitations
The examples ignore costs, taxes and the spread between buying and selling prices, which can be large for cheap, far-from-the-money options, as the liquidity lesson explains. Contract details are set by the exchange and change over time.
Common mistakes
- Buying options because they are cheap.
- Looking at premium paid instead of the move needed to break even.
- Ignoring contract value and the leverage it implies.
- Trading very short expiries without understanding how quickly they lose value.
Try it yourself
- Look at an option chain on an exchange website and identify the strike closest to the current price.
- For three call strikes above the current price, calculate the breakeven and the percentage rise needed.
- Compare the premiums for the same strike at two different expiries, and note how much more the longer one costs.
Key takeaways
- An option is identified by its underlying, expiry date, strike price and type, call or put. Its premium is quoted per unit of the underlying.
- Premium paid equals premium per unit times the lot size. Contract value, the strike or price times the lot size, is usually far larger.
- Exchanges list many strikes and expiries. Which expiries exist, and how lot sizes are set, are decided by exchange and SEBI rules that change over time.
- The premium depends on how far the strike is from the current price, the time left, and expected volatility.
- A very cheap premium usually means the option needs a large move in a short time to pay off. Cheap is not the same as good value.
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Terms used in this lesson
- Strike price
- The fixed price at which an option's buyer may buy (call) or sell (put) the underlying.
- Option premium
- The price paid by an option buyer to the seller, quoted per unit of the underlying.
- Expiry
- The last day a derivative contract exists, after which it is settled.
- Lot size
- The fixed number of units of the underlying in one derivative contract.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.