Option Premium

AAA

DEFINITION of 'Option Premium'

1. The income received by an investor who sells or "writes" an option contract to another party.

2. The current price of any specific option contract that has yet to expire. For stock options, the premium is quoted as a dollar amount per share and most contracts represent the commitment of 100 shares.

INVESTOPEDIA EXPLAINS 'Option Premium'

1. Investors who "write" covered calls or puts use option premiums as a source of current income in line with a broader investment strategy to hedge all or a portion of a portfolio.

2. Option prices quoted on an exchange such as the Chicago Board Options Exchange (CBOE) are considered premiums as a rule because the options themselves have no underlying value. The components of an option premium include its intrinsic value, its time value and the implied volatility of the underlying asset. As the option nears its expiration date, the time value will edge closer and closer to $0, while the intrinsic value will closely represent the difference between the underlying security's price and the strike price of the contract.

VIDEO

RELATED TERMS
  1. At A Premium

    The sale of an asset or item at a price significantly above the ...
  2. Premium Income

    1. In investing, income that is earned through the sale of an ...
  3. Time Value

    The portion of an option's premium that is attributable to the ...
  4. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  5. Writer

    The seller of an option who collects the premium payment from ...
  6. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
Related Articles
  1. Two basic components to an option's premium are the time value and intrinsic value.
    Options & Futures

    Getting A Handle On The Options Premium

    The price of an option, otherwise known as the premium, has two basic components: the intrinsic value and the time value. Understanding these factors better can help the trader discern which ...
  2. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  3. Options & Futures

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  4. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  5. Options & Futures

    Avoid Premature Exercise On Employee Stock Options

    With early exercise, you forfeit some profit back to your employer, and incur income tax to boot.
  6. Options & Futures

    Collecting Option Premium In The Grain Market

    Believe it or not, there are some great income-generating strategies that are lower in risk.
  7. Options & Futures

    What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical concept for options trading.
  8. Options & Futures

    Writing Covered Calls On ETFs

    The strategy of writing covered calls on ETFs can limit your losses and hedge risk, but they cap your upside potential.
  9. Options & Futures

    How are Bollinger BandsĀ® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets using these strategies.
  10. Options & Futures

    Stock Futures vs Stock Options

    A full analysis of when is it better to trade stock futures vs when is it better to trade options on a particular stock. A quick overview of how each of them works and why would a trader, investor, ...

You May Also Like

Hot Definitions
  1. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  2. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  3. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  4. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply ...
Trading Center