Options & Derivatives
Options Premium
The premium is what changes hands when an option is bought or sold. For the buyer it is the maximum possible loss; for the seller it is the income received in exchange for taking on obligation.
Premiums are shaped by several forces: how far the strike sits from the current price, how much time remains until expiration, and how high implied volatility is. More time and more expected movement mean richer premiums.
An option's premium also decays as expiration approaches, a phenomenon called time decay. Understanding what drives the premium is essential to trading options profitably.
Example
If a call option costs $2 per share, an investor pays a $200 premium to control 100 shares.
Related terms
Options Premium — FAQ
What is Options Premium?
An options premium is the price a buyer pays to purchase an option contract, representing the cost of the rights the option conveys.
Can you give an example of Options Premium?
If a call option costs $2 per share, an investor pays a $200 premium to control 100 shares.
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