Options Pricing: Distinguishing Between Option Premiums And Theoretical Value
It is important to differentiate between an option premium and its theoretical value. As discussed previously, the option premium is the price the option buyer pays to the seller in order to have the right granted by the option, and it is the money the seller receives in exchange for writing the option.
The theoretical value of an option, on the other hand, is the estimated value of an option – a price generated by means of a model. It is what an option should currently be worth using all the known inputs, such as the underlying price, strike and days until expiration. These factors often change during an option's lifetime, and some fluctuate in value on a continuing basis throughout any trading session.
A pricing model will create theoretical values, but they are just that – theoretical. Specific values for each factor can be used to predict an option contract's theoretical value at a given point in the future.
When options are first listed on a stock, for example, the market makers will not know what sort of implied volatility to use, so they must make educated guesses (theoretical values). The implied volatility will then change based upon the supply and demand for the options.

Option Premium
1. The income received by an investor who sells or "writes" an ... 
Time Value
The portion of an option's premium that is attributable to the ... 
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 ... 
Option
A financial derivative that represents a contract sold by one ... 
Implied Volatility  IV
The estimated volatility of a security's price.

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 >> 
Do options make more sense during bull or bear markets?
Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... 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 >> 
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 >> 
What's the difference between a regular option and an exotic option?
Before learning about exotic options, you should have a fairly good understanding of regular options. Both types 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 >>