How option prices react to the underlying

Beginners often expect a NIFTY call to rise ₹100 when NIFTY rises 100 points. It almost never does. An option's price depends on several things at once: where the underlying is compared with the strike, how much time is left, and how much movement the market expects. This guide explains how each one pushes the price, using simple numbers, so the option chain starts to make sense.

The underlying is what the option is based on: NIFTY, BANKNIFTY, a stock or a commodity. The premium is the option's price.

Delta: how much the option moves per point

Delta is the expected change in the option's price for a 1-point move in the underlying. Calls have delta between 0 and 1; puts between 0 and −1 (a put rises when the underlying falls).

These are illustrative; real deltas depend on time and volatility. The rule of thumb holds though: the closer an option is to being in the money, the more it behaves like the underlying itself. A deep in-the-money call is almost a substitute for the index; a far out-of-the-money call is mostly a lottery ticket on a big move. The delta guide goes deeper.

Gamma: delta changes as the price moves

Delta is not fixed. As NIFTY rises, the 25,000 call moves deeper in the money and its delta climbs from 0.50 towards 0.60, 0.70 and beyond. The rate at which delta changes is gamma. Because of gamma:

• An option that is winning speeds up: each further point adds more than the last.
• An option that is losing slows down: its delta shrinks, so it loses less per point as it moves out of the money.

Worked example: the 25,000 call costs ₹160 with delta 0.50. NIFTY rises 100 points. A simple delta estimate says +₹50. With gamma, the average delta over the move is closer to 0.55, so the call rises nearer ₹55 to about ₹215 (ignoring time and volatility). For a 300-point rally the difference is much bigger. Gamma is highest for at-the-money options close to expiry, which is why expiry-day prices swing so much; see the gamma guide.

See it on the live chain

Here is today's NIFTY option chain. Calls are on the left, puts on the right, and the highlighted row is the at-the-money strike:

Look at how call prices step down as strikes rise and put prices step up. The size of each step between neighbouring strikes is a rough picture of delta: big steps among in-the-money strikes, small steps among far out-of-the-money ones. If you check the chain again after NIFTY has moved, the at-the-money options will have changed by roughly half the move.

Time: the option loses value even if nothing moves

Part of every premium is time value: what buyers pay for the chance of a favourable move before expiry. As days pass, that chance shrinks and time value decays. This is theta. A NIFTY ATM call worth ₹160 with a week left might be worth ₹130 two days later with NIFTY unchanged.

So the real question for a buyer is not "will NIFTY rise?" but "will NIFTY rise enough and soon enough to beat the decay?" A 50-point rise over three days may not cover what theta took. The theta guide shows how decay speeds up near expiry.

Implied volatility: the market's mood

Implied volatility (IV) is the amount of movement the option price assumes. When traders expect big moves (before results, budget day or RBI policy), they pay more for options and IV rises. When the event passes, IV falls and premiums shrink. This sensitivity is vega.

Example: before an RBI policy announcement, the BANKNIFTY ATM straddle is priced for a big move. BANKNIFTY moves 250 points after the announcement, but the straddle still falls because IV dropped sharply. A call buyer who was right about the direction can still lose money. This is the "IV crush". Here is the BANKNIFTY ATM straddle, which shows the combined effect of moves, decay and IV through the day:

When the line spikes, a fast move or rising fear has outweighed decay; when it slides steadily, time and calm are winning. Neither tells you direction; it tells you how the price of movement is changing.

Rupees vs percentages: why cheap options feel exciting

Delta tells you the move in rupees. Traders often care about the move in percent. Take three NIFTY calls with NIFTY at 25,000 and a 100-point rise:

The far out-of-the-money call gains the least in rupees but the most in percent. That is why cheap options attract buyers. The other side of the same coin: if NIFTY falls 100 points or simply stays flat for a few days, the cheap call can lose most of its value just as quickly in percentage terms. Puts are the mirror image: everything above applies to a fall in the underlying instead of a rise.

A practical point follows. If you want an option that tracks the index closely with less decay, an in-the-money strike does that; if you want a small, fixed amount at risk for a chance at a big move, an out-of-the-money strike does that. Neither is better; they answer different questions, which the strike selection guide works through.

Putting it all together

Change in premium ≈ delta × move + ½ × gamma × move² + theta × days + vega × change in IV

You do not need to calculate this by hand. It simply says that four forces act at once: direction (delta), acceleration (gamma), time (theta) and fear (vega). On most days for near-the-money options, delta and theta dominate. Around events, vega can dominate. Near expiry, gamma takes over. The option Greeks guide covers all of them together.

Common mistakes

• Expecting rupee-for-rupee moves. Only deep in-the-money options come close.
• Buying far OTM options because "they will go up 10 times". They can, but their delta is tiny until the price gets close, and decay works against them every day.
• Ignoring IV before events. High IV means you are paying for a big move; if the move is smaller, the option falls.
• Holding through a quiet market. Even a correct direction can lose if the move comes too slowly.