Short answer: The strike price is the fixed level at which an option holder can buy the underlying asset or sell it. The premium is the price the buyer pays for that right, and expiry is the date after which the right ends. Together, these terms describe what an option promises, what it costs and how long it lasts.
What is a strike price?
The strike price is the predetermined level written into an option contract. A call option gives the holder the right to buy the underlying asset at that price, while a put option gives the right to sell at that price. The strike price is also called the exercise price, and the two terms mean the same thing in options trading.
The word that matters most is “right.” An option gives the buyer the right, but not the obligation, to buy or sell at the strike price. If the market price moves against the buyer, they can let the option lapse rather than use it. The seller of the option, however, takes on the obligation to honour the contract if the buyer chooses to use it.
What is the premium, and who pays it?
The premium is the amount the buyer pays the seller upfront to acquire the option. Because the buyer can walk away, the premium is usually the most the buyer can lose. The seller keeps the premium whatever happens, but carries the obligation if the buyer exercises.
The premium has two parts. Intrinsic value is the part that reflects the option’s immediate worth, and time value is the rest, which reflects the chance that the option becomes more valuable before it expires. A quick way to see this is to take the premium and subtract the intrinsic value.
When is an option in the money?
The term “moneyness” describes where the strike sits relative to the current spot price of the underlying asset. An option is in the money, at the money or out of the money depending on that gap. A call option is in the money when the spot price is above its strike price. A put option is in the money when the spot price is below its strike price.
Intrinsic value is the amount by which an in-the-money option’s strike is better than the market price. Out-of-the-money and at-the-money options have zero intrinsic value. Here is a hypothetical example, with every figure invented for illustration:
Suppose a share trades at 500 rupees, and a call option has a strike of 480 rupees with a premium of 26 rupees per share. The option is in the money by 20 rupees, so its intrinsic value is 20 rupees. The remaining 6 rupees of the premium is time value. If the same share traded at 470 rupees instead, the call would be out of the money, with zero intrinsic value, and its entire premium would be time value.
How does expiry affect the premium?
Expiry is the date on which the option contract ends. Time value shrinks as the option approaches that date, a process known as time decay. The reason is simple: there is less time remaining for the price to move in the buyer’s favour.
Returning to the hypothetical example, suppose the 26-rupee premium is made up of 20 rupees of intrinsic value and 6 rupees of time value. If the share price stays at 500 rupees, the time value of 6 rupees erodes as expiry nears. By expiry, the option is worth only its intrinsic value of 20 rupees, so the buyer’s premium of 26 rupees has lost 6 rupees per share.
What are the catches in this vocabulary?
An out-of-the-money option often looks cheap because its premium is small. In the hypothetical example, a call with a strike of 520 rupees on a share trading at 500 rupees might carry a premium of 4 rupees. That 4 rupees is all time value, so it decays. If the share stays at 500 rupees until expiry, the buyer loses the full 4 rupees per share. Across 1,000 shares, that is 4,000 rupees gone, even though nothing dramatic happened to the share price.
A second catch is that moneyness changes with the market. An option that is in the money today can move out of the money tomorrow, and its intrinsic value can fall to zero. Reading the strike, the premium and the expiry together, rather than any one term alone, is what shows what an option is worth and what it could lose.
Frequently asked questions
Is the strike price the same as the exercise price?
Yes. The strike price is also called the exercise price, and the two terms mean the same thing in options trading.
Does an option buyer have to use the option?
No. An option gives the buyer the right, but not the obligation, to buy or sell the underlying asset at the strike price.
Why does an out-of-the-money option have no intrinsic value?
Intrinsic value applies only to in-the-money options, where the strike is better than the market price. Out-of-the-money and at-the-money options have zero intrinsic value, so their premium consists of time value alone.
What happens to the premium as expiry approaches?
Time value shrinks as the option nears its expiry date, a process known as time decay.
Sources and last check
Facts in this article were checked against the sources below on 2 November 2026. Rules and figures can change; check the primary source before acting.
- dhan.co (broker education)
- groww.in (broker education)
- upstox.com (broker education)
- icicidirect.com (broker education)
- kotakneo.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.
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