Glossary
Option premium
The price paid by an option buyer to the seller, made up of intrinsic value plus time value.
The option premium is the price of an option contract: what the buyer pays and the seller receives for the rights the contract grants. It is quoted per share, so for a standard US equity option covering 100 shares a premium of $3.50 means $350 per contract. The buyer's maximum loss is the premium; for the seller, the premium is the most that can be earned on the trade.
What the premium is made of
Intrinsic value is what the option would be worth if exercised now: for a call, the stock price above the strike; for a put, the strike above the stock price; otherwise zero. Time value, also called extrinsic value, is everything else, the price of the possibility that the option becomes more valuable before it expires.
What moves the premium
- Underlying price relative to the strike, the largest driver day to day.
- Time to expiration: more time means more time value, which decays faster as expiration approaches.
- Implied volatility: higher expected volatility raises premiums for both calls and puts.
- Interest rates and dividends, smaller effects that matter more for long-dated options.
Premiums often rise ahead of known events such as earnings, when implied volatility climbs, and drop sharply right after the news, even if the stock moves. Buyers who are right about direction can still lose money when that volatility collapses.