Glossary term
Premium (Options)
The price paid by the option buyer and received by the seller for the contract; quoted per share, multiplied by 100 per contract.
Premium is the price paid by an option buyer and received by the seller for the contract. It is quoted per share and multiplied by 100 for a standard contract, and it splits into two parts: intrinsic value, which is any in-the-money amount, and time value, the extra a buyer pays for the chance the option moves further into profit before it expires.
It matters because time value erodes as expiration approaches, the decay known as theta, and reaches zero at expiry. That decay is the seller's structural edge and the buyer's cost: a buyer pays for optionality that bleeds away with each day, while a seller harvests it. How rich the premium is depends heavily on implied volatility.
Closelooknet documents premium as the income that covered-call writing and cash-secured puts are designed to collect, and reads how generous current premium is against the volatility being priced in.
In practice, a strike sold for $2.50 brings $250 per contract; if that premium is entirely time value, it decays toward zero by expiration as long as the stock stays put, which is the outcome a premium seller is positioned for.