Option Premium is the credit or income received by an investor who “writes” or sells an option contract to another party. The option premium may also refer to the current market price of any specific option contract that actively being traded and has yet to expire.
The premium is the total trade price of an option contract. The premium is paid to the seller of the option and is quoted on a per-share basis.
The premium of an option contract quoted at $6.50 per share, represents a premium/payment of $650 ($6.50 x 100 shares).
The Premium is non-refundable, and secures the buyer’s rights to either buy or sell the underlying asset according to the terms of the specific option contract.
“Writers” or sellers of options, receive the premium in exchange for “underwriting” or promising to sell or buy the underlying asset according to the terms of the specific option contract.
In some strategies that lay out buying and selling options on the same security, the selling portion of the theory is to collect premium for either cash flow or to defray the cost of the purchase.
