Financial Glossary
Premium
The price of optionality: what you pay to own or receive to sell an options contract.
What is Premium?
Premium is the price of an options contract. When you buy an option, you pay the premium to the seller. When you sell an option, you receive the premium. A $2 call means you pay $2 per share, or $200 per contract (100 shares). Premium consists of two parts: intrinsic value (how far in-the-money the option is) and time value (the remaining time before expiration and expected volatility).
For example, a $100 call on a stock at $103 has $3 intrinsic value (stock is $3 in-the-money). If that call is trading at $4, the $1 difference is time value. At expiration, only intrinsic value remains; all time value decays away. This decay accelerates near expiration, which is why theta risk matters.
What Determines Premium?
Premium depends on multiple factors captured by the Greeks: strike (moneyness affects delta), time to expiration (theta), implied volatility (vega), and gamma. Deep out-of-the-money options are cheap because they have low probability. At-the-money options are most expensive because they have the most time value and highest gamma. Selling deep out-of-the-money options (high probability of expiring worthless) collects less premium but offers high odds of success.
High implied volatility increases premium across all strikes because expected moves are larger. Selling premium in high IV environments is attractive; buying in low IV environments is attractive. Premium decay benefits option sellers (they collect it) and hurts option buyers (they pay it).
Disclaimer: Premium does not guarantee profitability. Buying options requires the underlying to move significantly enough to offset premium paid. Selling premium creates risk if the stock moves against your position. Before trading options, consult a qualified financial advisor. Options involve substantial risk.