Option premium price


An option premium is the income received by an investor who sells or option premium price an option contract to another party.

An option premium may also refer to the current price of any specific option contract option premium price has yet to expire. For stock options, the premium is quoted as a dollar amount per share, and most contracts represent the commitment of shares.

Option prices quoted on an exchange such as the Chicago Board Options Exchange Option premium price are considered premiums as a rule, because the options themselves have no underlying value. The components of an option premium include its intrinsic valueits time value and the implied volatility of the underlying asset. The main factors affecting an option's price are the underlying security's price, moneyness, useful life of the option and implied volatility. As the price of the underlying security changes, the option premium changes.

As the underlying security's price increases, the premium of a call option increases, but the premium option premium price a put option decreases. As the underlying security's price decreases, the premium of a put option increases, and the opposite is true for call options. The moneyness affects the option's premium because it indicates how far away the underlying security price is option premium price the specified strike price.

As an option becomes further in-the-money, the option's premium normally increases. Conversely, the option premium decreases as the option becomes further out-of-the-money. For example, as an option becomes further out-of-the-money, the option premium loses intrinsic value, and the value stems primarily from the time value.

The time until expiration, or the useful life, affects the time value, or extrinsic value, portion of the option's premium. As the option approaches its expiration date, the option's premium stems option premium price from the intrinsic value. Implied volatility is derived from the option's price, which is plugged into an option's pricing model to indicate how volatile a stock's price may be in the future. Moreover, it affects the extrinsic value portion of option premiums. If investors are long options, an increase in implied volatility would add to the value.

The opposite is true if implied volatility decreases. Option Premium By Investopedia Staff. What is 'Option Premium' An option premium is the income received by an investor who sells or "writes" an option contract option premium price another party. Factors Affecting Option Premium The main factors affecting an option's price are the underlying security's price, moneyness, useful life of the option and implied volatility.

Implied Volatility Implied volatility is derived from the option's price, which is plugged into an option's pricing model to indicate how volatile a stock's price may be in the future.