What is options premium?

Options premium is the price of an options contract, what the buyer pays and what the seller receives. Understanding what makes up premium, and what causes it to rise and fall, is foundational to every options trade you'll ever make.

Premium is quoted per share

Options premium is always quoted on a per-share basis. Since one standard options contract controls 100 shares, multiply the quoted premium by 100 to get the actual dollar cost.

Example: A call with a premium of $3.50 costs $350 per contract. A premium of $0.75 costs $75 per contract.

The two components of premium

Every options premium is made up of two distinct parts:

1. Intrinsic value The real, immediate value of the option right now, how far ITM it is. Only ITM options have intrinsic value.

• Call intrinsic value = Max(Stock price − Strike, 0)
• Put intrinsic value = Max(Strike − Stock price, 0)

2. Extrinsic value (time value) Everything above intrinsic value. This is the uncertainty premium, what the market is paying for the possibility that the option could become more valuable before expiration. All options have extrinsic value until expiry. OTM options are 100% extrinsic.

Example: AAPL at $195. The $190 call trades at $7.50.

• Intrinsic value: $195 − $190 = $5.00
• Extrinsic value: $7.50 − $5.00 = $2.50

What drives premium higher

Time to expiration: More DTE = higher premium. The stock has more time to make a favorable move, so the option is worth more.

Implied volatility: Higher IV = higher premium. When the market expects larger moves, uncertainty is priced in more expensively. This is why options are pricier before earnings and major events.

Strike proximity to stock price: ATM options carry the most extrinsic value. As strikes move further OTM or deeper ITM, extrinsic value decreases.

Stock price level: Higher-priced stocks have higher absolute premiums. A 2% expected move on a $500 stock produces more dollar premium than on a $50 stock.

What causes premium to fall

Time passing (theta): Every day, extrinsic value erodes. This erosion accelerates in the final 30 days before expiration. At expiry, all extrinsic value reaches zero.

Falling implied volatility: A drop in IV directly reduces extrinsic value. IV crush after earnings can deflate premiums significantly even without the stock moving.

Stock moving away from the strike (for sellers): If you've sold an OTM option and the stock moves further from your strike, the option loses value, profit for you.

Premium for buyers vs sellers

Buyers pay premium upfront. This is their maximum loss. The stock must move enough, and fast enough, to exceed the premium paid and generate a profit.

Sellers collect premium upfront. This is their maximum profit. The goal is for time decay, falling IV, or the stock staying on the right side of the strike to erode the option's value toward zero.

Real-world example

SPY is at $510. You're comparing two trades:

Trade A, Buying a call: Buy the $515 call for $4.00. You pay $400 per contract. SPY must rise above $519 by expiration for this trade to profit. Max loss: $400.

Trade B, Selling a put: Sell the $500 put for $2.50. You collect $250 per contract. SPY must stay above $497.50 for this trade to profit. Max profit: $250.

Both trades are built entirely around premium, paying it or collecting it, but the risk/reward profiles are fundamentally different.

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

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

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