Option premium

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Option premium

Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Option Premium

The price one pays to buy an option contract, whether it is a call or a put, when one is the first buyer. That is, when the option is written, its first buyer pays the option premium. It should not be confused it with the strike price, which is the price one would pay for the underlying asset, should the option be exercised.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

option premium

See premium.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Option premium.

When you buy an option, you pay the seller a nonrefundable amount, known as the option premium, for the right to exercise that option before it expires.

If you sell an option, you receive a premium from the buyer. In fact, collecting the premium is often one motive for selling options, including those you anticipate will expire without being exercised.

An option premium is not a fixed amount, and typically increases as the option moves in-the-money and decreases if it doesn't move in-the-money.

However, factors such as the price and volatility of the underlying instrument, current interest rates, and the amount of time left before the option expires also affect the premium price.

You can look at the current range of premium prices in the Options Quotations tables in newspapers or on options websites, such as the Options Clearing Corporation (OCC) website.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
The crude's rally from six-year lows plumbed in January and easing option premiums have opened a "great opportunity" to buy extra insurance against a new slump, he said.
(This simplified example ignores Meg's trading costs.) If Meg wishes, she can keep selling calls and keep collecting option premiums.
When price moves quickly, especially to the downside, option premiums rise quickly, pushing the VIX higher."
Due to market fluctuations, Gazprom's implied volatility has increased 3- 10 ppt WoW for various maturities; however, in the event of a price increase over three-six months, IV is highly likely to decline, which would lead option premiums to decrease.
It often moves higher when stocks decline sharply as players bid up protective option premiums.
Most option hedgers, therefore, are aware of the importance of delta as a measure of how option premiums change as the underlying futures price changes, but generally shun trying to achieve delta neutral hedges.
In this case, the taxpayer treated loan purchase commitment fees it received as option premiums; see Federal Home Loan Mortgage Corp.
But since option premiums always include at least some speculative value until just before they expire, investors holding American options will almost always be better off if they sell the options rather than exercise them, if they wish to close out the position before the expiration date.
Fung, 1990, "Information-Content of Volatilities Implied by Option Premiums in Grain Futures Markets", Journal of Futures Markets, 10:13-27
"We also calculate option premiums in order to know the limit of useful expenditure, particularly when the work can be bought finished by acquisition of another company, or via a license.