Definition
The option premium is the cost of buying an option contract, paid by the buyer to the seller (writer). It consists of intrinsic value (if any) and time value. Premiums are influenced by factors including underlying price, strike price, time to expiration, volatility, and interest rates.
Formula
Example
If a call option costs $3.50, that's the premium you pay per share. For a standard 100-share contract, the total cost is $350.
FAQ
What is Option Premium?
The price paid to purchase an option contract.
How do you calculate Option Premium?
A common formula for Option Premium is: Premium = Intrinsic Value + Time Value
Why is Option Premium important?
Option Premium helps investors evaluate options and make more informed decisions.
Related Terms
Intrinsic Value
The calculated true worth of a company based on fundamental analysis.
Time Value (Options)
The portion of an option premium above its intrinsic value.
Implied Volatility (IV)
The market's expectation of future price volatility implied by option prices.
Theta (Options Greek)
Measures how much an option loses value each day due to time decay.