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Premium

The price of an option, quoted per share and paid per contract of 100 shares.

Premium is what the buyer pays and the seller receives. It is the sum of intrinsic-value and extrinsic-value, and it is driven by the stock price, strike-price, time to expiration, implied-volatility, and interest rates.

Because of the options-multiplier, a premium of $1.50 costs $150 per contract.

Example: a $50 call on a $52 stock quoted at $3.20 has $2.00 of intrinsic value and $1.20 of extrinsic value. Buying five contracts costs $1,600.

Related: intrinsic-value, extrinsic-value, options-multiplier, implied-volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How an option's time value decaysA curve sliding gently downward at first and then dropping steeply into expiry, where it reaches zero.Extrinsic (time) value6420906030Value bleeds away slowly at firstDecay speeds up hereWorth nothing at expiryexpiryDays to expiry
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

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