Net Option Premium

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DEFINITION of 'Net Option Premium'

The net amount an investor or trader will pay for selling one option, and purchasing another. The combination can include any number of puts and calls and their respective position in each.

The net option premium can either be positive, which represents a net cash outflow, or a negative number, which represents a net cash inflow.

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BREAKING DOWN 'Net Option Premium'

For example, assume an investor wants to take a synthetic covered call position in a particular stock. If the investor pays $2.50 per lot for a put option with a strike price of $55, and then sells a call option at the same strike price for $1.00 per lot. The net option premium in this example is $1.50.

If, on the other hand, the investor pays $0.50 per lot for a put option with the same strike price, and sells a call option for $1.00 per lot, then there will be a net cash inflow (a negative net option premium) of $0.50.

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RELATED FAQS
  1. Can an option have a negative strike price?

    The simple answer is that, at least when it comes to exchange traded options, an option can't have a negative strike price ... Read Full Answer >>
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    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
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    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How do I determine the breakeven point for a short put?

    The breakeven point for a short put is the strike price of the option minus the premium. Selling puts is a way for traders ... Read Full Answer >>
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