Step Premium

AAA

DEFINITION of 'Step Premium'

A type of option where the cost of purchasing the option is paid gradually as the strike approaches instead of when the trade is initiated. The options contract spells out how much premium must be paid and when. A step premium option is more expensive than a plain vanilla in-the-money option, but less expensive than a contingent premium option. With the latter, the investor does not pay a premium if the option expires out of the money.

INVESTOPEDIA EXPLAINS 'Step Premium'

A step premium option is considered a structured option. A wide variety of options exist to meet different investment needs, and their premiums reflect the unique risks and rewards associated with each type of option. Investors like options because they offer a cost-efficient way to invest in an underlying asset, they can reduce investment risk when used correctly, they allow the potential for higher percentage returns by using leverage and they provide the flexibility to develop numerous trading strategies.

RELATED TERMS
  1. Exercise

    To put into effect the right specified in a contract. In options ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. In The Money

    1. For a call option, when the option's strike price is below ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
  6. Options Contract

    A contract that allows the holder to buy or sell an underlying ...
Related Articles
  1. Pin Down Stock Price With Real Options
    Investing Basics

    Pin Down Stock Price With Real Options

  2. The
    Options & Futures

    The "True" Cost Of Stock Options

  3. The Importance Of Time Value In Options ...
    Options & Futures

    The Importance Of Time Value In Options ...

  4. Stock Safety: Top 3 Ways to Limit Your ...
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center