Premium, strike and expiry

The last module gave you the skeleton of an option: buy or sell, call or put, a strike, an expiry, a premium. This module turns the skeleton into a working machine by showing how three of those parts — the premium, the strike and the expiry — move together, and how the space between the strike and the actual price gives every option a name: in the money, at the money, or out of the money.

Why does this deserve a whole module? Because the single most common beginner mistake in Indian options is not choosing the wrong direction — it is choosing the wrong strike and the wrong expiry for the view they hold, and then blaming the market when the clock, not the direction, decides the outcome. A trader can be exactly right about where a stock is going and still lose the entire premium because the option they bought was too far out of the money, or expired before the move arrived. The strike and the expiry are not details. They are where most of the money is won and lost.

By the end you will be able to pick up any option quote and read three things at a glance: how far the strike sits from the price, how much time is left on the clock, and therefore what kind of bet the premium is really pricing.

Open the option chain for any Indian index or large stock and you see a grid: many strike prices running up and down, several expiry dates running across. That grid exists so that buyers and sellers with different views and different time frames can meet at a precise price. One person wants protection until next Thursday; another wants a cheap long-shot on a big move by month-end. The grid lets each find exactly the contract that fits.

Two features of the Indian market shape that grid, and you must know both.

Expiries are standardised, and short. On the NSE, index options expire on a fixed weekday every week — a weekly expiry, an option whose life is measured in days — as well as monthly. Stock options are monthly. The push toward ever-shorter expiries is one of the defining, and most dangerous, features of the modern Indian market: enormous volumes now trade in options that live for only a day or two. Short expiries make the premium cheap, which makes them feel accessible, which is exactly why so much retail money flows into them and so much of it is lost. We return to this in Part Five; for now, simply note that "cheap" and "short-lived" are the same fact seen from two sides.

Contracts trade in fixed lots. You cannot buy one share's worth of an option. Every contract controls a fixed bundle — the lot size, the exchange-set quantity a single contract represents. An index option lot might be 25 or 50 units of the index; a stock option lot is set per stock so that one lot is worth a few lakh rupees of the underlying. This matters enormously: a premium that looks like "just ₹40" is ₹40 multiplied by the whole lot, and the position it controls is worth many times your outlay. The lot size is how a small premium quietly becomes a large exposure.

The relationship between the strike and the current price has a name — moneyness — and it splits every option into three buckets. Learn the ladder once for a call, and the put is simply its mirror.

For a call (the right to buy at the strike):

• In the money (ITM) — the strike is below the current price. The right to buy cheap, when the market is dearer, already has real value. An ITM ₹2,400 call, with the stock at ₹2,500, is worth at least ₹100 the moment you hold it.
• At the money (ATM) — the strike sits at (or nearest to) the current price. The right is on the knife-edge: worth nothing yet if exercised, but a hair from being worth something.
• Out of the money (OTM) — the strike is above the current price. The right to buy at ₹2,700, when the market sells the same share for ₹2,500, is worth nothing if used today. You are paying purely for the chance the stock climbs past the strike before expiry.

For a put (the right to sell at the strike) the whole ladder flips: a put is in the money when the strike is above the price (the right to sell dear into a cheap market), and out of the money when the strike is below it.

Here is the rule that ties moneyness to price: the further out of the money an option is, the cheaper it is — because the less likely it is to ever be worth anything. A cheap OTM option is not a bargain. Its low price is the market's honest estimate that it will expire worthless. You are not getting more for less; you are being told the odds, in rupees.

Put the three dials together on one stock. illustrative

A stock trades at ₹2,500. You expect it to rise, and you have ₹10,000 to spend. Look at what the same budget buys across the grid.

Notice what the ₹10,000 does at each rung. In the deep-ITM call, ₹10,000 buys a few units that move nearly rupee-for-rupee with the stock — expensive, but honest. In the far-OTM weekly, the same ₹10,000 buys a huge pile of cheap contracts that will almost all expire worthless within days. The pile feels like more, and that feeling is the whole trap: quantity is not probability. A thousand tickets that are each very likely to be worth nothing are still, together, very likely to be worth nothing.

Over enough trades, the small structural costs you barely notice decide the outcome — and options are riddled with them. Every option you buy carries brokerage, a bid-ask spread you cross twice, exchange fees, and Securities Transaction Tax. On a ₹5 weekly option those costs are a large slice of the premium. Even before the market moves, the far-OTM buyer is paying a toll that the deep-ITM buyer barely feels. The cheaper the option, the heavier those fixed costs weigh — another reason the "cheap" ticket is the expensive choice in disguise.

The premium looks like a single, simple price. It is not. It is a bundle of judgements about distance, time and uncertainty, and reading it as "cheap" or "dear" without unpacking it is how beginners misjudge the bet.

Cheap encodes 'unlikely,' not 'good value.' The lower the premium, the further the strike and the shorter the clock, and therefore the smaller the chance of a payout. A market that priced OTM options generously would be handing out free money; it does not. The price is the probability, expressed in rupees, and it is set by people with far more information than the beginner buying the cheap ticket.

A short expiry is a fast-running clock, not a discount. The reason a weekly costs a fraction of a monthly is that it has a fraction of the time to come good. You are not saving money; you are buying far less time for your view to be right. The next module shows exactly how that time drains away, and it drains fastest in the final days — precisely where retail volume is now heaviest.

The lot size multiplies everything. Because you trade a whole lot at once, a premium that feels like pocket money commits a position worth lakhs. A ₹40 premium on a 250-unit lot is ₹10,000 at risk against ₹6,50,000 of stock. Read the position, not the premium.

The strike-and-expiry grid catches beginners in a handful of predictable ways.

1. Buying the cheapest strike because it's cheapest. The far-OTM option is cheap because it will probably expire worthless. Cheap is the market's warning, not its invitation.

2. Confusing quantity with edge. A big pile of cheap contracts feels like a bigger bet. It is the same money on longer odds. More tickets, not better odds.

3. Matching a slow view to a fast option. A thesis about "this quarter" bought through a weekly option is almost guaranteed to be killed by the clock before it can be proven right, however correct the direction.

4. Reading the premium, not the position. "It's only ₹40" ignores the lot size that turns ₹40 into ₹10,000 controlling lakhs of stock.

5. Ignoring the toll. Brokerage, spread and STT eat a real share of a small premium every time you trade. On cheap weeklies, the toll alone can be the difference between a break-even view and a loss.