--- title: "How is an option price calculated | RupeeCase" description: "An option's price is the discounted expected payoff at expiry, worked out from the futures price, the strike, the time left." source_url: "https://www.rupeecase.com/learn/questions/how-option-price-is-calculated" --- An at the money call keeps time value, so its curve sits above the expiry payoff Profit and loss for one lot of the at the money call bought at its 10 Jun 2026 settle price, for the 30 Jun 2026 chain. The curve with 10 days left uses the call's own implied volatility that day. Source: NSE end of day data, computed by RupeeCase. As of 10 Jun 2026. Look at the at the money call on the 30 Jun 2026 Nifty chain, taken at the close on 10 Jun 2026. Its premium is that day's exchange settle price, and the chart shows what it is made of. An option price is an expected payoff, worked out on the futures price and then discounted back to the date of the trade. The school prices index options with Black 76, which takes the futures level, the strike, the time left, the implied volatility and the interest rate as inputs. For a call the formula is: C = e-rT × [F N(d1) - K N(d2)] N is the normal distribution. d1 and d2 measure how far the futures sit from the strike, in units of volatility over the time left. The first four inputs can be read off the market. Implied volatility cannot, so it is backed out from the settle price. The premium has two parts. Intrinsic value is what the option would pay if it expired at that close. Time value is the rest, the price of the chance that the index moves further before expiry. This strike sits above the index, so the call has no intrinsic value and all of its premium is time value. That is the gap above the expiry line on the chart. Time value shrinks as expiry comes near, and it shrinks fastest in the last days. Change the volatility input and the price changes with it, even if the index does not move. The chart is for learning the shape of the price, not a forecast of where the premium goes. **Before you trade.** Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. [Read the SEBI study](https://www.sebi.gov.in/reports-and-statistics/research/aug-2026/study-profitability-of-individual-traders-in-the-equity-derivatives-segment-fy25-fy26-_103835.html) How is an option price calculated?An option's price is the discounted expected payoff at expiry, worked out from the futures price, the strike, the time left, the implied volatility and the interest rate. For an at the money option the whole premium is time value, and that part shrinks as expiry comes near. LGo deeper ## Where Learn teaches this. [Go deeperFive things that move an option's price8 min, Beginner](/learn/path-14/module-14-5-what-moves-an-option-price)[Go deeperFrom a binomial tree to Black Scholes and Black 769 min, Intermediate](/learn/path-14/module-14-9-binomial-tree-to-black-76)[Try itGreeks calculatorDelta to rho, and vanna to colour in expert mode, from one Black 76 engine.](/learn/tools/greeks-calculator) SSources ## Go to the source. 3 sources, NSE the most cited The publisher of each source listed below. Source: Module undefined source list. 1. [SEBI investor education, Understanding derivatives](https://investor.sebi.gov.in/understanding_derivatives.html) SEBI 2. [NSE, equity derivatives contract specifications (expiry, lot size, settlement)](https://www.nseindia.com/static/products-services/equity-derivatives-contract-specifications) NSE 3. [Black (1976), The pricing of commodity contracts, Journal of Financial Economics](https://ideas.repec.org/a/eee/jfinec/v3y1976i1-2p167-179.html) Paper ?Questions people ask ## Related questions. 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