Option Premium
Option premium is the price paid by an option buyer and received by an option seller for the contract.
✦ Key Insight
It is the buyer's upfront cost and a central component of option profit-and-loss calculations.
✕ Common Misconceptions
A low premium does not automatically mean low risk, especially for an option seller.
Detailed Explanation
In Practice
Dig Deeper
Call Option
A call option gives its holder the right, but not the obligation, to buy an underlying asset at a specified strike price before or at expiration, depending on the contract style.
Put Option
A put option gives its holder the right, but not the obligation, to sell an underlying asset at a specified strike price before or at expiration, depending on contract style.
Strike Price
The strike price is the predetermined price at which an option can be exercised according to its contract terms.
Implied Volatility (IV)
Implied volatility is the volatility level that an option pricing model backs out from the option's current market price.
Theta
Theta estimates how an option's value changes as time passes, all else equal.