What is an 'Option Premium'
An option premium is the income received by an investor who sells or "writes" an option contract to another party. An option premium may also refer to 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.
BREAKING DOWN 'Option Premium'
Investors who write 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.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.
Factors Affecting Option Premium
The main factors affecting an option's price are the underlying security's price, moneyness, useful life of the option and implied volatility. As the price of the underlying security changes, the option premium changes. As the underlying security's price increases, the premium of a call option increases, but the premium of a put option decreases. As the underlying security's price decreases, the premium of a put option increases, and the opposite is true for call options.
The moneyness affects the option's premium because it indicates how far away the underlying security price is from the specified strike price. As an option becomes further inthemoney, the option's premium normally increases. Conversely, the option premium decreases as the option becomes further outofthemoney. For example, as an option becomes further outofthemoney, the option premium loses intrinsic value, and the value stems primarily from the time value.
The time until expiration, or the useful life, affects the time value, or extrinsic value, portion of the option's premium. As the option approaches its expiration date, the option's premium stems mainly from the intrinsic value. For example, deep outofthemoney options that are expiring in one trading day would normally be worth $0, or very close to $0.
Implied Volatility
Implied volatility is derived from the option's price, which is plugged into an option's pricing model to indicate how volatile a stock's price may be in the future. Moreover, it affects the extrinsic value portion of option premiums. If investors are long options, an increase in implied volatility would add to the value. The opposite is true if implied volatility decreases. For example, assume an investor is long one call option with an annualized implied volatility of 20%. Therefore, if the implied volatility increases to 50% during the option's life, the call option premium would appreciate in value.

Step Premium
A type of option where the cost of purchasing the option is paid ... 
Call On A Put
One of the four types of compound options, this is a call option ... 
At The Money
A situation where an option's strike price is identical to the ... 
Premium Income
1. In investing, income that is earned through the sale of an ... 
Stock Option
A privilege, sold by one party to another, that gives the buyer ... 
Back Fee
A payment made to the writer of a compound option in the case ...

Trading
What is Meant by Implied Volatility?
The estimated volatility of a security's price. 
Trading
The Basics Of Option Price
Options can be an excellent addition to a portfolio. Find out how to get started. 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
Trading Options on Futures Contracts
Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ... 
Trading
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 ... 
Trading
What Is Option Moneyness?
Get the basics under your cap before you get into the game. 
Trading
What Drives An Option's Price?
The primary drivers of an optionâ€™s price are the underlying stockâ€™s current price, the optionâ€™s intrinsic value, its time to expiration and volatility.

How can derivatives be used to earn income?
Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >> 
How does implied volatility impact the pricing of options?
Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >> 
Do you have to be an expert investor to trade put options?
Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >> 
Are there any risks involved in trading put options through a traditional broker?
Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>