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StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.Simple Definition
The price you pay to buy an option contract.
Why It Matters
Premium is the maximum you can lose when buying options. If a call costs $3.50 premium, that's $350 per contract (100 shares × $3.50). Option sellers collect premium as income - it's how strategies like covered calls generate cash flow.
Key Points
- Premium = intrinsic value (real value) + extrinsic value (time + volatility)
- High volatility = expensive premiums (like buying insurance during a hurricane)
- Sellers keep premium if options expire worthless - this is how the 'theta gang' profits
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Common Questions
The price you pay to buy an option contract. Premium is the maximum you can lose when buying options. If a call costs $3.
Premium is the maximum you can lose when buying options. If a call costs $3.50 premium, that's $350 per contract (100 shares × $3.50). Option sellers collect premium as income - it's how strategies like covered calls generate cash flow.
Premium = intrinsic value (real value) + extrinsic value (time + volatility)
High volatility = expensive premiums (like buying insurance during a hurricane)
Sellers keep premium if options expire worthless - this is how the 'theta gang' profits