What Is an Option Premium?
An option premium is the amount an investor pays to buy an options contract from a seller, also called the writer. The premium is the market price of the contract. It is paid when the trade is opened and is generally not refunded, whether or not the option is later exercised. The buyer gains the right, but not the obligation, to buy or sell the underlying stock at the strike price before the contract expires. The seller takes on the obligation that comes with that right.
On US stock options, premiums are quoted per share, and a standard contract covers 100 shares. A quoted premium of 2.50, for example, means the contract costs 250 before commissions.
How the Premium Is Determined
The premium has two main parts. Intrinsic value is the amount by which an option is already in the money. A call is in the money when its strike price is below the current stock price, and a put is in the money when its strike price is above it. Options without intrinsic value are out of the money. Time value is the remaining portion, reflecting the chance that the option could become profitable before expiration. Time value generally shrinks as expiration approaches, a pattern known as time decay.
Market expectations of future price movement, often measured as implied volatility, also influence the premium. Higher expected volatility tends to raise premiums because larger price swings make the option more likely to finish valuable.
Option Premium = Intrinsic Value + Time Value
Why It Matters to Investors
For buyers, the premium is the total cost of the position and the maximum amount that can be lost on a purchased option. For sellers, the premium is the maximum profit from the sale, but losses can be much larger than the premium received, depending on the position. Premiums are therefore a central input when comparing the cost and risk of different option strategies.
Premiums also change throughout the trading day as the stock price, the time remaining, and volatility expectations shift. The price paid at purchase may therefore differ from the value shown later.
Updated October 15, 2026. For general education only; not financial, tax or legal advice.