⏳ What an option is worth: intrinsic value, time value and decay

🎯 In 30 seconds: An option's price has two parts. Intrinsic value is what it would be worth if it expired right now: for a call, the amount the underlying is above the strike; for a put, the amount it is below. Time value is everything else: what buyers pay for the chance of a better outcome before expiry. Time value is largest for at-the-money options, grows with time left and with expected volatility, and shrinks to zero at expiry. The shrinking speeds up near the end, which matters in India because so much trading happens in weekly options in their last days.

Two parts of every option price

Think of a mango seller at 6 pm. A crate that cost ₹2,000 this morning is worth less now, because by tomorrow the fruit will be overripe. Part of the morning price was for the mangoes themselves, and part was for the time left to sell them at full freshness. As the evening wears on, that second part melts away.

An option price works the same way:

Option price = intrinsic value + time value

• Call intrinsic value = underlying price - strike, if positive, otherwise 0.
• Put intrinsic value = strike - underlying price, if positive, otherwise 0.
• Time value = option price - intrinsic value.

Hypothetical: the Nifty is at 24,000. The 23,800 call with a week left trades at 320. Intrinsic value: 24,000 - 23,800 = 200. Time value: 320 - 200 = 120. With a lot of 65, the lot is worth ₹20,800, of which ₹13,000 is intrinsic and ₹7,800 is time value.

In, at and out of the money

An OTM option is all time value. Its whole price is a payment for the chance that the underlying moves past the strike before expiry. On expiry, an OTM option is worth nothing.

Worked example: splitting five prices

Hypothetical Nifty calls priced with a standard model: Nifty at 24,000, seven days to expiry, implied volatility 14%, interest rate assumed at 6%.

Time value peaks at the money. Deep ITM options carry little time value because they already behave much like the index. Far OTM options carry little because the chance they end up in the money is small. The ATM option carries the most uncertainty about whether it will end with value, so the market charges the most for it.

What makes time value bigger or smaller

• Time left. More days means more chances for a large move. A 30-day ATM Nifty call in this model is worth about 445 points; a 7-day one about 200.
• Expected volatility. If the market expects bigger moves, every option is worth more. In the model, the 7-day ATM call is worth 147 at 10% implied volatility, 200 at 14% and 253 at 18%. India VIX, covered in Implied volatility and India VIX, tracks this for the Nifty.
• Distance from the strike. Closer to ATM, more time value. Further away in either direction, less.
• Interest rates and dividends. Smaller effects. Higher rates nudge calls up and puts down. An expected dividend on a stock nudges its calls down and puts up, because the share price is expected to drop when it goes ex-dividend.

Time decay speeds up at the end

If the Nifty stands still, an option's time value does not leak away evenly. It drains slowly at first and then very fast.

Same model as before, with the Nifty stuck at 24,000 and volatility unchanged. The daily cost of holding this option rises roughly threefold in its last week. That daily cost is the Greek called theta, covered in The Greeks.

India's weekly options live entirely in the steep part of this curve. A weekly Nifty option is born with about a week to go, so it never has the slow phase. And trading piles into the last day: SEBI's August 2026 study found that 70% of index option turnover in FY25 happened on the expiry day itself, falling to 59% in FY26 after SEBI's measures.

Why most short-dated OTM options expire worthless

Take the far OTM 24,400 call from the table: 57 points with seven days left. For it to be worth anything at expiry, the Nifty must rise more than 400 points (1.7%) in a week. For the buyer to profit, it must rise above 24,457 (1.9%).

The model's delta for this call is about 0.22, which is loosely read as a 22% chance of ending in the money. So in roughly four weeks out of five, under the model's assumptions, the buyer loses the full 57 points. In the fifth week the payoff must be large enough to cover the other four, and often it is not. The model's odds are not a promise either: real markets have quiet weeks and sudden jumps that a simple model does not capture.

The seller of that call sees the mirror image: they collect a small premium most weeks and take a large loss occasionally. Neither side gets a free lunch. What the buyer and seller both pay, every time, is the spread and charges, which is part of why SEBI's studies keep finding most individual traders losing money.

Value before expiry vs at expiry

Payoff diagrams in this course usually show value at expiry, because it is simple: intrinsic value only. Before expiry, an option is worth intrinsic value plus time value, so the curve is smooth and sits above the expiry line for bought options.

Two practical results:

• Selling usually beats holding to the end. If you are long an option with time value left, selling it in the market collects that time value. Letting it expire throws the time value away.
• Near-expiry ITM prices can sit slightly below intrinsic value. Because Indian options are European style and can only be exercised at expiry, and because charges apply to every leg, you may see a deep ITM option quoted a little under its intrinsic value close to expiry. Do not assume an ITM option will always fetch at least intrinsic value at the bid.

Try it

On a Monday, open NSE's option chain for the Nifty 50 weekly expiry (Tuesday as of October 2026). Write down the Nifty level and the LTP of the ATM call and put, and of calls and puts 200 and 400 points away. Split each price into intrinsic and time value. Repeat at the same time each trading day until expiry, then note the settlement. Put the numbers in a spreadsheet and chart the ATM time value against days left. Compare your chart with the decay curve above. If you cannot check on Tuesday afternoon, use the monthly expiry instead and record the last five trading days.

Sources

• NSE: Nifty 50 futures and options, contract specifications (European style, base price using the Black-Scholes model)
• NSE: Option chain
• SEBI: Measures to strengthen equity index derivatives framework, 1 October 2024
• SEBI: Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26), August 2026 (PDF)
• NSE: Revision in market lot of derivative contracts on indices, 3 October 2025 (PDF)