Five inputs, one price
Every option pricing model — including the one Finostat uses to compute the IV and greeks you see on the chain — starts from the same five inputs:
| Input | Call premium rises when it… | Put premium rises when it… |
|---|---|---|
| Spot price | rises | falls |
| Strike | is lower | is higher |
| Time to expiry | is longer | is longer |
| Volatility | rises | rises |
| Interest rate | rises (slightly) | falls (slightly) |
Four of the five you can look up. The fifth — volatility — is the only genuine unknown, which is why options are really volatility instruments dressed up as directional ones. Chapter 8 is entirely about it.
Black-Scholes without the calculus
The Black-Scholes formula answers one question: if the underlying wanders randomly with a given volatility, what is the average payout of this option at expiry, discounted to today? The intuition is a bell curve of possible expiry prices centred near spot, whose width is set by volatility × √time. A call's value is the average of (expiry price − strike) over the part of the curve above the strike. Move the strike up and less of the curve counts; widen the curve (more vol, more time) and more of it counts.
Two consequences that matter for trading:
- Time value grows with the square root of time, not linearly. A 4-week option is worth about twice a 1-week option, not four times. Equivalently, decay is slow far from expiry and violent in the final days.
- ATM options are pure volatility. Their value is almost entirely time value, and it is almost exactly proportional to volatility. That makes the ATM straddle a direct readout of the market's expected move.
The expected move: reading the market's forecast
Add the ATM call and ATM put premiums together and you get the straddle. A very good rule of thumb: the straddle price is the market's one-standard-deviation expected move to expiry. If it costs 240 points, the market is pricing NIFTY to finish within ±240 of spot about two-thirds of the time. Here it is, live:
This number is the single most useful thing on the chain. It tells you whether a strategy's breakevens sit inside or outside what the market already expects. Selling a strangle with breakevens narrower than the implied move is betting the market is overestimating volatility; buying a straddle is betting it is underestimating. Neither is automatically right — the market's forecast is decent but not perfect — but you should always know which side of it you are on.
Why theta accelerates
Because time value scales with √time, the decay per day (theta) scales with 1/√time. With 16 days left an ATM option loses about 1/32 of its value per day; with 4 days left, about 1/8; on the last day, almost all of it. This is the mechanism behind the “cheap options before expiry” trap in Chapter 1: the buyer is paying for a day whose time value is evaporating at the fastest rate of the option's life.
A complete worked example
Say NIFTY is 23,635, the 23,650 call trades at ₹150 with 7 days to go, and you buy one lot (65). You pay ₹9,750. Three scenarios at expiry:
| NIFTY at expiry | Call worth | P&L per share | P&L per lot |
|---|---|---|---|
| 23,500 (down) | 0 | −150 | −₹9,750 |
| 23,800 (up 165) | 150 | 0 | ₹0 — right on direction, still flat |
| 24,000 (up 365) | 350 | +200 | +₹13,000 |
Read the middle row twice. NIFTY rose 165 points — 0.7%, a decent week — and you made nothing, because you paid 150 for the right to participate. That is what “right on direction, wrong on price” means, and it is the most common way beginners lose. The cure is not to stop buying options; it is to buy them when the premium is low relative to the move you expect, which requires understanding volatility. That is Chapter 8, after the Greeks.