What Is Options Premium

Options premium is the price you pay to buy an options contract or the amount you collect when you sell one. It is the fundamental unit of value in all options trading. Every strategy, every Greek, every pricing concept in options ultimately revolves around premium: how much you pay for it, how much you collect for it, and what happens to it over time.

The basic definition

Premium is the market price of an options contract, quoted on a per-share basis. Since one standard options contract covers 100 shares, multiply the quoted premium by 100 to calculate the actual dollar cost or income.

Examples: A call with a premium of $3.50 costs $350 per contract. A put with a premium of $1.20 costs $120 per contract. Selling a covered call for $2.00 generates $200 in immediate income per contract.

What premium represents for each party

For the buyer: premium is the maximum amount you can lose. Whatever you pay upfront is your worst-case loss, regardless of how far the stock moves against you. No margin calls. No additional losses beyond the initial premium.

For the seller: premium is the maximum profit you can make on the trade. When you sell an option, you collect the premium immediately and keep it if the option expires worthless. Your risk is the obligation you take on, not the premium itself.

The two components of premium

Every option price is made up of two distinct parts:

Intrinsic value: the real, immediate value of the option if exercised right now. Only in-the-money options have this. For a call, intrinsic value is the stock price minus the strike price (when positive). For a put, it is the strike price minus the stock price (when positive). Intrinsic value cannot be negative.

Extrinsic value: everything above intrinsic value. Also called time value. This is the portion of premium that reflects uncertainty and time remaining. All options have extrinsic value until expiration. Out-of-the-money options are made entirely of extrinsic value.

Total premium = intrinsic value + extrinsic value

At expiration, extrinsic value reaches exactly zero. An expiring option is worth only its intrinsic value (if in the money) or zero (if out of the money).

What causes premium to rise

Implied volatility increases: when the market expects larger future moves (before earnings, during market stress), IV rises and all option prices increase. Higher IV inflates the extrinsic value of every option.

More time remaining: options with more days to expiration cost more. The stock has more time to make a favorable move.

Strike moving closer to the current stock price: ATM options carry the most extrinsic value. As an OTM option's strike gets closer to the stock price, premium rises.

Higher underlying price: for calls, a higher stock price means more intrinsic value and higher premium.

What causes premium to fall

Time passing (theta decay): every day, extrinsic value erodes. The decay accelerates as expiration approaches. By expiration day, all extrinsic value is gone.

Implied volatility falling: when IV drops (after earnings, after a VIX spike resolves), extrinsic value deflates rapidly. This is IV crush.

Stock moving away from the strike: if a call's strike was close to the stock and the stock falls significantly, the option moves deeper OTM and loses value.

Premium and strategy selection

Understanding premium as a two-part structure leads directly to strategy selection:

Sellers harvest extrinsic value. When you sell a covered call or iron condor, you are collecting extrinsic value that erodes in your favor through theta decay and IV mean reversion. The optimal conditions for sellers are high implied volatility (maximum extrinsic value to collect) and sufficient time for decay to work.

Buyers need the stock to move enough to overcome premium paid. When you buy a call, you need the stock to rise above your strike by more than the premium paid just to break even at expiration. The premium you pay is a cost that the directional move must overcome.

This is why buying options in high-IV environments is risky for buyers: you pay inflated premium that collapses after the event (IV crush), requiring a very large move just to break even.

Related terms: Intrinsic value, extrinsic value, theta, IV rank, implied volatility, bid-ask spread

Try it on Stryke: Compare live premium levels across strikes and expirations for any ticker in the Options Screener.

---