Spot Premium

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DEFINITION of 'Spot Premium'

The money an investor pays to a broker in order to purchase a single payment options trading (SPOT) option. With a SPOT option (also called a binary option) the investor chooses the payout he wants and the market conditions he wants to occur in order to receive that payout. The broker then sets a premium for the option based on the probability of the investor's predictions occurring.

BREAKING DOWN 'Spot Premium'

The spot premium is usually a percentage of the payout. After the broker sets the premium, the investor can choose to go ahead and buy the option if she is satisfied with the price, or to decline if she thinks the price is too high. If the payout conditions do occur, the investor collects his payout. If they not occur, the investor will lose the spot premium. However, no matter what happens in the market, the most she can lose is the spot premium.

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RELATED FAQS
  1. What is the difference between trading currency futures and spot FX?

    The forex market is a very large market with many different features, advantages and pitfalls. Forex investors may engage ... Read Full Answer >>
  2. How is the forex spot rate calculated?

    The forex spot rate is determined by supply and demand. Banks all over the world are buying and selling different currencies ... Read Full Answer >>
  3. Why do futures' prices converge upon spot prices during the delivery month?

    It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  6. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>

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