Options Pricing
What is Premium?
The price paid to purchase an option contract.
📖 Complete Definition
The option premium is the market price of an option contract, determined by factors including intrinsic value, time value, implied volatility, and interest rates. Premium is quoted per share, so a $2.50 premium costs $250 for one contract (100 shares). Option sellers collect premium as income, while buyers pay premium for the right to exercise.
💡 Examples
- →A call option trading at $3.50 costs $350 per contract (100 shares × $3.50)
- →Premium increases with longer time to expiration and higher implied volatility
❓ Frequently Asked Questions
Why does premium decrease over time?
Time decay (theta) erodes the time value component of premium as expiration approaches. This accelerates in the final weeks before expiration.
Put Your Knowledge to Practice
Use our free options tools to analyze trades, calculate Greeks, and visualize profit/loss scenarios.