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. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Exercise

    To put into effect the right specified in a contract. In options ...
  3. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  4. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Strike Price

    The price at which a specific derivative contract can be exercised. ...
Related Articles
  1. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  2. Options & Futures

    The "True" Cost Of Stock Options

    Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs.
  3. Options & Futures

    The Importance Of Time Value In Options Trading

    Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.
  4. Options & Futures

    What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being bought and sold.
  5. Options & Futures

    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 option brokers.
  6. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  7. Options & Futures

    These Are The Top Brokerage Firms For Options Trading

    Trading options? Here is the list of the best brokerage firms for options trading, with features, functionality, and brokerage rates.
  8. Options & Futures

    What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence perplexes many investors and analysts.
  9. Options & Futures

    Apple As An Example Of How a Protective Collar Works

    We define a protective collar, using Apple (AAPL) as an example. A protective collar is a combination of a covered call plus long put position.
  10. Options & Futures

    Apple As An Example Of How to Use a Bull Call Spread to Trade

    Here's how you can use a bull call spread to trade stocks.

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center