Option premium

Option price (option premium) is the sum the option buyer pays to the seller.

Option sellers always receive the premium whereas buyers pay it. The profit potential for the seller is limited to the premium and risks are conditionally unlimited. For the buyer, on the contrary, risks are limited to the premium paid and the profit potential is conditionally unlimited. It’s important to know that a premium is not a constant and may change along with the price movement of the underlying asset. Changes in demand and supply, volatility and other factors can also influence the option premium.

When buying options, the buyer risks money (option premium) that he may never recover if he sells the option in the future at a lower price than it was bought. To estimate the amount received on the transaction, you need to compare the amount of income and premium.

When selling options sellers collect the premium, which will be his profit if the option contract isn’t exercised and it is out-of-the-money at expiration. If it’s exercised, the seller still has the premium but he is obliged to buy or sell the underlying asset and it will influence total money made.

Options Glossary