Option Premiums Explainer
An option premium is the price of the contractual right. Exchange-listed equity options are commonly quoted per share even though one standard contract generally represents 100 shares, so the displayed quote must be multiplied by the contract size to estimate the cash amount.
Premium can be separated conceptually into intrinsic value and time value. Intrinsic value reflects the immediate exercise advantage, if any. The remainder reflects time, expected volatility, rates, distributions, and the possibility that the option becomes more favorable before expiration.
Longer time and higher implied volatility often increase premiums because they expand the range of plausible outcomes. The effects vary by strike and maturity, and supply, demand, interest rates, dividends, and early-exercise features can change the relationship.
Receiving a premium is not the same as earning a profit. The writer keeps the cash up front but assumes an obligation whose market value can grow sharply. Buyers and sellers should compare the bid, ask, multiplier, commissions, breakeven, and maximum loss rather than focusing on a small-looking quote.
A per-share quote must be scaled to the number of covered units.
Fees and the bid-ask spread add to the economic cost.
Intrinsic value is only one component.
Time and expected volatility can dominate an out-of-the-money premium.
The writer remains exposed until the position closes or expires.
Mark the obligation to market, not just the initial credit.
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