Option premium

Option premium is the price of an options contract on a recognised exchange such as the National Stock Exchange , quoted per unit of the underlying, that the option buyer pays and the option seller receives in full at the trade. It has exactly two parts: intrinsic value, the amount by which the option is already in the money, and time value, everything the buyer pays beyond that for the chance the option gains before expiry.

The premium is the single number a trader watches most. For the buyer it is the entire cost and the entire maximum loss. For the seller, or writer, it is the entire maximum gain, collected against margin that can run to lakhs per lot . On Zerodha Kite the premium drives two opposite cash flows: a debit when you buy, a credit when you write. This article sets out the two components, how the option Greeks move the premium, how the credit and debit work on Kite funds, and why a profitable short still shows a debit when you buy it back, a point that confuses most new option sellers.

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this article does not carry it and earns no referral commission.

Intrinsic value plus time value

Every option premium decomposes into intrinsic value plus time value. The split is exact and additive, and it is the foundation for reading whether an option is cheap, dear, or all hope.

Intrinsic value is the payoff if the option were exercised now, floored at zero. For a call it is spot minus strike; for a put it is strike minus spot. It can never be negative, because the holder simply lets a worthless option lapse. A Nifty 25000 call with the index at 25,200 carries 200 points of intrinsic value; the same call with the index at 24,800 carries zero, because spot minus strike is negative and floors at zero.

Time value is the rest of the premium, the amount above intrinsic value that the buyer pays for the possibility the option moves further in the money before expiry. An out-of-the-money option has zero intrinsic value, so its entire premium is time value. Time value is highest for at-the-money options and decays to zero by expiry, when only intrinsic value remains. If a Nifty 25000 call trades at 260 with the index at 25,200, the 200 points of intrinsic value leave 60 points of time value; that 60 is what theta erodes over the contract’s life.

What the buyer pays and the seller receives

The premium is a single price settled in opposite directions. The buyer pays it in full and upfront; buying an option needs no margin, only the premium, and the maximum loss is that premium. The seller receives it in full and takes on the obligation: to deliver the underlying at the strike if a written call is exercised, or to buy the underlying at the strike if a written put is assigned. Writing an option blocks the full SPAN plus exposure margin , because the writer carries large or unlimited risk while collecting a fixed premium.

For a Nifty option priced at 100 with the post-October-2024 lot of 75, the contract value of the premium is Rs 100 times 75, or Rs 7,500. That is the buyer’s outflow and the writer’s inflow at the trade. The asymmetry is the whole point of options: the buyer’s risk is bounded at the premium, the writer’s gain is bounded at the premium, and the rest of the risk sits with the writer.

How the Greeks drive the premium

The option Greeks are the sensitivities of the premium to the variables that move it: the underlying price, time, volatility, and rates. They are how a trader reads, before the fact, how the premium will change. The theme article how to read option Greeks on Kite covers reading them in the platform; the summary here is how each one acts on the premium itself.

• Delta measures how much the premium moves per one-point move in the underlying. A delta of 0.5 means the premium rises about 0.5 points for each point the underlying rises. Deep-in-the-money options approach a delta of 1 and track the underlying nearly one-for-one; deep-out-of-the-money options approach zero.
• Gamma measures how fast delta itself changes as the underlying moves. It is highest for at-the-money options near expiry, which is why those premiums whip around most on the last day.
• Theta measures the daily erosion of time value. It is the buyer’s standing enemy and the writer’s standing friend: every day that passes drains time value from the premium, accelerating in the final week before expiry. A premium of 60 points of time value with five sessions left can lose a fifth or more in a single day near expiry.
• Vega measures how much the premium changes per one-point change in implied volatility . Rising volatility inflates premiums through vega; falling volatility deflates them. A volatility crush after a results announcement can collapse an option’s premium even when the underlying moves in the buyer’s favour, because the vega loss outweighs the delta gain.
• Rho measures sensitivity to the risk-free rate. It is the smallest Greek for the short-dated contracts that dominate Indian retail volume and rarely drives a trade.

Implied volatility deserves its own emphasis: it is the market’s forward estimate of how much the underlying will move, backed out of the option’s traded premium. Two options identical in strike, expiry, and underlying differ in premium only through their implied volatility, so a high-IV premium is the market pricing a larger expected swing. India VIX, the NSE’s volatility index built from Nifty option premiums, is the index-level read of the same quantity.

Premium credit and debit on Kite funds

On Kite the premium shows up as cash moving in two directions, and the timing differs between buying and writing.

Buying an option debits the full premium from your funds the moment the order fills. There is no margin, no T+1 lag on the debit, and no further obligation; the premium paid is the most you can lose. Writing an option credits the premium to your trading account, but in the live account that credit reflects only the next trading day, even though the Zerodha margin calculator nets the premium against the blocked margin the instant you model the trade. So a writer sees the margin block immediately and the spendable premium a day later. The credit counts toward the cash component of the 50:50 cash requirement for F&O margin, which helps sellers running several short positions. The funds-page detail is in option premium credit on Kite funds .

Charges attach to the premium. Zerodha levies a flat Rs 20 brokerage per executed order on options. STT on the sale of options is charged on the premium, currently 0.15% after the 1 April 2026 Budget hike, up from 0.1% under the October 2024 regime. On an exercised in-the-money option, STT is instead 0.15% of the intrinsic value, a charge that can exceed a thin profit and is the standing reason to close in-the-money positions before expiry rather than let them exercise. The full schedule is in Zerodha F&O charges and options exercise charges on Zerodha .

Why a profitable short still shows a debit on buy-back

This is the mechanic that catches most new option writers, so it is worth stating plainly. When you write an option you sell it to open and receive the premium. To close the position before expiry you must buy the same option back, and that buy-back is always a cash debit, because you are repurchasing something you sold. The debit appears regardless of whether the trade made money.

The profit is the difference between the two premiums, not the buy-back figure. Write a Nifty call at a premium of 100 (Rs 7,500 credit on a 75 lot), watch theta and a flat underlying drag the premium down to 30, and buy it back: the buy-back debits Rs 30 times 75, or Rs 2,250. The trade made Rs 7,500 minus Rs 2,250, or Rs 5,250, before charges, even though the closing leg was a debit. Read the realised P&L as premium received minus premium paid to close, and the apparent contradiction disappears.

The same logic runs in reverse for a loss: if the premium had risen to 160, the buy-back would debit Rs 12,000 against the Rs 7,500 credit, a realised loss of Rs 4,500. The buy-back is a debit either way; only its size relative to the opening credit decides profit or loss.

At expiry: intrinsic value is all that is left

At expiry the time value has fully decayed and only intrinsic value remains. An in-the-money option settles at its intrinsic value: index options on Nifty and Sensex are cash-settled, debiting or crediting the intrinsic value, while all single-stock options are physically settled, obliging delivery or receipt of the shares. An out-of-the-money option expires worthless, its entire premium having been time value that decayed to zero. For a writer, an out-of-the-money expiry turns the whole premium received into realised profit; an in-the-money expiry can trigger the physical settlement and exercise-STT mechanics that often make squaring off before expiry the cheaper exit. The exercise route and its withdrawal are covered in the do-not-exercise option .

See also

• Option premium credit on Kite funds
• Theta decay
• Vega of options
• Gamma of options
• Delta of options
• Implied volatility
• ITM, ATM and OTM moneyness
• How to read option Greeks on Kite
• How to use the options chain on Kite
• How to trade options on Kite (first time)
• How to sell a call option on Zerodha
• How to sell a put option on Zerodha
• Naked option selling margin on Zerodha
• SPAN margin on Zerodha
• Exposure margin on Zerodha
• 50:50 cash collateral rule explained
• Volatility indicators overview
• Physical settlement of stock F&O
• Do-not-exercise option
• Expiry-day options trading
• Zerodha F&O charges
• Options exercise charges on Zerodha
• STT hike of October 2024 on F&O
• F&O taxation in India
• F&O segment on Zerodha
• Futures and options
• Options trading
• Derivatives trading
• Zerodha margin calculator
• National Stock Exchange
• Kite (Zerodha)
• Zerodha

External references

• NSE: equity derivatives contract specifications
• Zerodha Varsity: options module
• Zerodha charges
• Zerodha margin calculator
• NSE: India VIX
• SEBI

References

1. NSE, Equity derivatives contract specifications: option premium quoted per unit of the underlying, European-style exercise at expiry.
2. Zerodha charges, zerodha.com/charges (as of 21 June 2026): flat Rs 20 brokerage per executed order on options, STT 0.15% on the sale of options on premium and 0.15% on intrinsic value of exercised options, effective 1 April 2026 per Budget 2026-27.
3. Zerodha support, How is the margin calculated for selling options? (as of 21 June 2026): premium credited to the account, reflected in the live account the next trading day.
4. NSE, India VIX methodology: volatility index derived from the order book of Nifty option premiums, annualised, 30-day.
5. NSE, Physical settlement of stock derivatives: in-the-money single-stock options physically settled, index options cash-settled at intrinsic value.