Premium

Premium is the price of an options contract — the amount of money the buyer pays to the seller (often called the writer) to obtain the rights that the option grants.

An option gives the buyer the right, but not the obligation, to buy or sell a stock at a set price before a certain date. That right isn't free. The premium is what changes hands so the buyer gets it and the seller takes on the risk of having to fulfil the contract if the buyer chooses to exercise it. Premium is quoted per share, but a standard option contract usually covers 100 shares, so the amount actually paid is the quoted premium multiplied by 100 (plus any commissions or fees).

Premium is made up of two components: intrinsic value and time value. Intrinsic value is how much the option would be worth if it were exercised right now — for example, a call option letting you buy a stock at $50 when the stock trades at $55 has $5 of intrinsic value. Time value is everything above that, reflecting the chance the option becomes more valuable before it expires. Time value shrinks as expiration approaches, a process traders call time decay.

The nuance beginners often miss is that premium isn't fixed — it moves constantly based on the underlying stock's price, how much time is left, and how volatile the market expects the stock to be (implied volatility). Two options with the same strike price and expiration can have very different premiums at different moments, and an option can lose value even if the stock doesn't move at all, simply because time passed.