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.

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.