Premium
The price paid for an options contract.
Also called: option price · option premium
In plain language
Premium is what the buyer pays and the seller collects. It is quoted per share, so a $2.40 premium on a standard 100-share contract costs $240.
It has two components: intrinsic value, the amount already in the money, and extrinsic value, which reflects remaining time and implied volatility.
For a buyer, the premium is the entire risk. For a seller, it is the entire maximum profit — while the risk can be far larger.
The formula
Option Premium
Intrinsic Value + Extrinsic Value
- Contract cost
- Premium × 100 (standard US equity contract)
Why it matters
For long options the premium is your maximum risk, which makes it the number you divide your risk budget by to get contract count.
Common mistakes
- Forgetting the 100x multiplier and buying ten times the intended exposure.
- Paying inflated premium into an event where implied volatility collapses immediately after.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The portion of an option’s premium that would be realized if exercised right now.
The part of an option’s premium beyond intrinsic value, reflecting time and volatility.
The market’s expectation of future price movement, derived from option prices.
How much value an option loses per day purely from the passage of time.
The amount of an asset you buy or sell in a single trade.