How Can a Call Option Decline in Value When a Stock Rises?

How Can a Call Option Decline in Value When a Stock Rises?

Let's accept the fact that no one can 100% predict the stock market, as is the case with options trading. Maximum investors argue that options traders lose money, but one fact that each trader should understand is that options trading is not a get-rich-quick scheme.

Options trading requires discipline, risk management skills, and proper understanding and knowledge—not just in options trading but also in derivatives trading itself, which is a different game as both can be rewarding and stressful.

Just like in a situation where call option value is declining while that of the stock rises, before going into all the ifs and buts, let's first understand the meaning of strike price and stock price. To navigate the complexities of options trading and make well-informed decisions, it can be highly beneficial to utilize an Options Trading App.

With an Options Trading App, traders can access real-time market data, track options prices, analyze market trends, and execute trades conveniently from their mobile devices or computers. These apps often provide educational resources, tools for risk management, and features that can enhance the trading experience.

By leveraging the capabilities of an Options Trading App, traders can gain a competitive edge and improve their chances of success in the dynamic options market.

Read More About Algo Trading 

What Are The Different Types of Derivatives?

Understanding The Basics of Option Pricing

Strike Price

Pulse trace glowing on computer monitor generated by ai

The strike price is the price at which you can buy or sell the underlying asset, basically, it is the predetermined price at which you trade call, or put option before the expiration date. 

In The call option strike price can be considered as the cost at which security is purchased and in the put option strike price can be considered as the cost at which security is sold.

Stock Price

The strike price remains the same throughout the contract but the stock price changes constantly. The stock price is also known as the current price of the option which keeps on changing based on the market volatility.


Moneyness is one of the important factors in determining the value of the stock option, moneyness is a term that helps in describing whether the contract is either,

In the money ( ITM ) 
Out of the money ( OTM ) 
At the money ( ATM )

Now let's discuss in detail about them, 

Moneyness is a concept that helps in determining how much money a trader will make if the option is exercised in real-time.

When the stock price is more than the strike price is called In the Money ( ITM ). This means that the stock price has a positive value here so we can conclude that,

  • A call option is said to be ITM when the strike price is less than the stock price. 
  • A put option is said to be ITM when the strike price is more than the stock price.
When the stock price and strike price are equal the option situation is known as At the Money option ( ATM ).

When the stock price is zero then the option strike is called out of the money ( OTM), we can consider it has no stock price. So we can conclude that,

  • A call option is considered an OTM when the strike price is more than the spot price.
  • A put option is considered an OTM when the strike price is less than the spot price.
Let's also understand what intrinsic value is,

Intrinsic Value

Intrinsic value is the reflection of the actual value of the strike price versus the stock price. 

Intrinsic value in call option = stock price - strike price 
Intrinsic value in put option = strike price - stock price 

Thus from above,  we can conclude that only in the money ( ITM ) can have intrinsic value 

Now that we understand the basic price concept of option trading, let's find out the reason for a decline in call options when the stock price rises.

Reasons For Decline in Option Value

👉 Time value

Time plays a key role in an option contract, the time value can be considered as an enemy for an option buyer as it diminishes the value of the option each day because the option contract moves towards the expiration the value of the option tends to become zero.

However, experienced options traders understand that time decay can also work in their favor when they employ effective options strategies. By using an Options Strategy Builder, traders can create and implement various strategies that take advantage of time decay and other market factors.

An Options Strategy Builder allows traders to customize their trading approach by selecting specific options contracts, strike prices, and expiration dates to construct strategies tailored to their objectives. It enables traders to visualize potential outcomes, assess risks, and adjust their positions accordingly.

With the help of an Options Strategy Builder, traders can optimize their options trading strategies and potentially increase their chances of profitability in the market.
Let's consider an example

Suppose you have a call option of XYZ stock with the strike price of the stock is ₹ 100, and the currently trading stock price is ₹ 120. The call option expires in 3 months and the call option value is worth ₹ 20.

After 2 months the stock price jumped to ₹ 150 as the company booked a good amount of profit but the call option decreased to ₹ 13 as the option contract was near expiration, and the value of the option contract started declining.

From the Above we can conclude that as the stock price increases, the option contract starts to lose its value due to time delay. Further time value is also described as the proportion of option premium due to the number of days until the expiry date.

In general terms, time value is the description of the probability that an option would have an intrinsic value at expiration or not. In technical terms, time value is option premium excess of intrinsic value before expiration and so as discussed above in the money ( ITM ) has intrinsic value.
Time value - option premium - intrinsic value

Also, time value is only affected by option trading as option contracts are for finite value but stock traders don't worry about the time value as stocks are not for a finite period. The longer the amount of time available for an asset the greater the chance of profit.

In a nutshell, we come to the conclusion that time value is an important factor to be considered as it may be possible that the stock move in the right direction but option value lose its position.

👉 Implied Market Volatility

Volatility means a measure of risk, when we say stocks are volatile means it is unpredictable to measure the risk and every investor wants to invest in the stocks whose returns are stable so due to the price of the stock decreases as there is an inverse relationship between volatility and share price but the situation is reversed in the options market.

Volatility directly impacts call and put options in the same direction as there is a direct relationship between volatility and options contracts.

Let's consider a situation where there is any news or rumors or expectation about the underlying assets the demand for asset increases or we can say the volatility of assets increases which lead to an increase in option value.

So from above we can summarise that there is an indirect relation between volatility and stock price but direct relation with option contract hence there is a high chance that when volatility decreases the share price will increase but the call and put option will decrease as both option value and volatility moves direction.

👉 Wrapping Up 👈

Thus we can conclude that time value and volatility are the two main factors due to which even though stock price increases but call option declines.

So understanding the options market is a tough game but SpeedBot's option trading tool will help you to get in the option trading game without being in any fear of losing it.

Speedbots option trading strategy will help you to make your fortune in. the option trading market, so what are you waiting for,  get in touch with our expert team at SpeedBot and enjoy option trading.
Download our mobile app


Stay tuned with us!



How Can a Call Option Decline in Value When a Stock Rises?
Nisarg S 26 June, 2023
Share this post
What is DCA Trading Bot? How to Mitigate Risk by Dollar-Cost Averaging?