Option premium

Option price (premium): is the only feature of an option contract indicating the price (nonrefundable payment) which the option buyer pays to the seller for the rights detailed in a particular contract.

Since there are 2 parties in the option contract the option premium establishes buyers/sellers and therefore their rights and obligations detailed in the contract. So, option sellers always receive the premium whereas buyers pay it. It’s important to know that a premium is not a constant and can vary day by day. It can be affected by demand and supply in the market where an option as well as a particular stock is traded. The asset’s volatility is also an important factor influencing option premium. It’s important to take into account usual and current asset’s conduct in the market.

When buying options a buyer spends money he may not recover if he doesn’t sell an option with a profit. To estimate the sum made on this transaction it’s important to compare the income and premium size. When selling options sellers collect the premium, which will be his profit if the contract isn’t exercised. If it’s exercised the seller still has the premium but is obliged to buy/sell the underlying asset so it will influence total money made.

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