Options Terminology
Explained
A clear, practical reference for every term you will encounter when reading option chains, research notes, or discussing trades — grounded in Indian market conventions.
The contract building blocks
Every option contract is defined by four elements: the underlying, the type (call or put), the strike price, and the expiry date. Understanding each is the starting point before anything else.
- Call option — gives the buyer the right to buy the underlying at the strike price on or before expiry. Buyers profit when the underlying rises above the strike. See glossary: call option.
- Put option — gives the buyer the right to sell the underlying at the strike price. Buyers profit when the underlying falls below the strike. See glossary: put option.
- Strike price — the price at which the option can be exercised. On NSE, NIFTY strikes are listed at 50-point intervals. The strike you choose relative to the current spot price determines the option's moneyness. See glossary: strike price.
- Expiry — the date the contract ceases to exist. NIFTY and Bank Nifty have weekly expiries every Thursday and a monthly expiry on the last Thursday of each month. See glossary: expiry.
- Lot size — the minimum number of units per contract. NIFTY lot size is currently 75; Bank Nifty is 35. All P&L calculations are multiplied by lot size. See glossary: lot size.
Premium, intrinsic value, and time value
The premium is the price you pay to buy an option (or receive, if you sell). It is quoted per unit, so multiply by lot size for the actual INR amount. For example: a premium of ₹100 on a NIFTY lot = ₹100 × 75 = ₹7,500 total.
Premium has two components:
- Intrinsic value — the amount by which the option is already in-the-money. A 22,400 call with NIFTY at 22,500 has ₹100 of intrinsic value. Out-of-the-money and at-the-money options have zero intrinsic value. See glossary: intrinsic value.
- Time value (extrinsic value) — everything above intrinsic value. It reflects the probability that the option will gain more value before expiry. Time value erodes to zero by expiry — this is theta decay. See glossary: time value.
The full mechanics of premium are covered in Option Premium Explained.
Moneyness: ITM, ATM, OTM
Moneyness describes where a strike sits relative to the current spot price. It is one of the most frequently used terms in option chain analysis.
- In the money (ITM) — a call where strike < spot, or a put where strike > spot. ITM options have intrinsic value. See glossary: in-the-money.
- At the money (ATM) — the strike closest to the current spot. ATM options have the highest time value and the most sensitivity to moves. See glossary: at-the-money.
- Out of the money (OTM) — a call where strike > spot, or a put where strike < spot. OTM options are cheaper and composed entirely of time value. See glossary: out-of-the-money.
A full breakdown of moneyness with examples is at ITM, ATM, OTM Explained.
Open interest and change in OI
Open interest (OI) is the total number of outstanding option contracts at a strike that have not yet been closed, exercised, or expired. It is the primary positioning indicator in an option chain.
Change in OI is the intraday or day-over-day change. Rising OI means new positions are being added; falling OI means positions are being closed. Combining OI change with price direction gives you buildup analysis:
- Long buildup — price up, OI up (fresh buying). See glossary: long buildup.
- Short buildup — price down, OI up (fresh short selling). See glossary: short buildup.
- Short covering — price up, OI down (shorts exiting). See glossary: short covering.
- Long unwinding — price down, OI down (longs exiting). See glossary: long unwinding.
Deep-dive: What is Open Interest? and Reading OI Change.
Implied volatility and India VIX
Implied volatility (IV) is the market's forward-looking expectation of how much the underlying will move, expressed as an annualised percentage. It is derived from the option's market price — not calculated from historical data. High IV = expensive options; low IV = cheap options. See glossary: implied volatility.
India VIX is NSE's own volatility index derived from NIFTY option prices — the Indian equivalent of the CBOE VIX. A rising India VIX signals that the market is pricing in increased uncertainty, and option premiums expand accordingly. Read more at India VIX and Trading.
Contextualising IV over time is done via IV Rank and IV Percentile — indicators that tell you whether current IV is high or low relative to its own recent history.
The Greeks
The Greeks quantify how an option's price responds to changes in various inputs. Every serious options trader tracks at least the first four.
- Delta — how much the option price changes for a 1-point move in the underlying. ATM options have delta near 0.5; deep ITM near 1.0; deep OTM near 0. See glossary: delta.
- Gamma — how fast delta changes as the underlying moves. Gamma is highest for ATM options close to expiry. See glossary: gamma.
- Theta — daily time decay. A theta of −5 means the option loses approximately ₹5 per unit per day, all else equal. See glossary: theta.
- Vega — sensitivity to implied volatility. A vega of 10 means the option gains ₹10 per unit for every 1% rise in IV. See glossary: vega.
- Rho — sensitivity to interest rates. Least impactful for short-dated options. See glossary: rho.
Full coverage in Option Greeks Explained and the live dashboard at Option Greeks.
PCR and max pain
Put-Call Ratio (PCR) = total put OI ÷ total call OI for a given expiry. It is a sentiment indicator — read relative to the instrument's own recent range, not against a fixed benchmark. See glossary: put-call ratio and What is PCR?
Max pain is the strike at which outstanding option buyers would collectively suffer the largest financial loss at expiry — i.e. the point of maximum pain for option buyers and maximum benefit for writers. Price often gravitates toward max pain as expiry nears. See glossary: max pain and What is Max Pain?
A worked NIFTY example tying the terms together
Suppose NIFTY spot is 22,500 (hypothetical). You buy one lot of the 22,600 call expiring this Thursday at a premium of ₹90 per unit (total: 90 × 75 = ₹6,750).
- Strike: 22,600. Moneyness: OTM (spot is below strike).
- Intrinsic value: ₹0 (OTM). Time value: ₹90 (entire premium).
- Delta: approximately 0.35 — a 100-point NIFTY rise adds roughly ₹35 per unit to the option value.
- Theta: say −₹12 per day — each passing day costs you ₹12 × 75 = ₹900 in time value.
- If IV rises 2% due to uncertainty, vega might add ₹20 × 75 = ₹1,500 to your position's value even without a spot move.
This is how the terminology connects in a live trade.
Common mistakes from misunderstanding terminology
- Confusing volume and open interest — volume resets daily; OI accumulates over time.
- Treating PCR as a precise buy/sell signal rather than a relative sentiment gauge.
- Assuming an ITM option is "better" without accounting for its higher premium cost and lower leverage.
- Ignoring vega when buying options before high-volatility events — you may be paying for elevated IV that collapses after the event.
Frequently asked questions
What is the difference between intrinsic value and time value?
Intrinsic value is the immediately realisable value of an option — for a call, it is spot price minus strike price (when positive). Time value is the additional premium above intrinsic value, reflecting the probability that the option can gain more value before expiry. At-the-money and out-of-the-money options have zero intrinsic value and are composed entirely of time value.
What does open interest tell you in options?
Open interest is the total number of outstanding option contracts at a given strike that have not yet been closed, exercised, or expired. High open interest at a strike indicates significant positioning there. Rising open interest alongside price movement helps identify whether new buying or selling is driving the move.
What is implied volatility in simple terms?
Implied volatility (IV) is the market's forward-looking expectation of how much the underlying will move, expressed as an annualised percentage. High IV means options are expensive; low IV means they are cheap relative to historical norms. IV tends to spike before events and fall sharply after them.
What are the option Greeks and why do they matter?
The Greeks measure how an option's price changes in response to various inputs. Delta measures sensitivity to the underlying's price. Gamma measures how fast delta changes. Theta measures daily time decay. Vega measures sensitivity to implied volatility. Together they form the risk dashboard for any options position.
See these terms in a live option chain
TradePulse displays strike, OI, change in OI, IV, Greeks, PCR, and max pain on NIFTY and Bank Nifty — free to explore.