Option Premium

An option premium is the price of an option contract, which is the right to buy or sell an underlying asset at a predetermined price. The option premium is paid by the buyer of the option to the seller, also known as the option writer. The option premium is composed of two parts: the intrinsic value and the time value. The intrinsic value is the difference between the underlying asset’s price and the strike price of the option. The time value is the amount of money that the option is worth beyond the intrinsic value, and is based on the amount of time remaining until the option expires.

History of Option Premium

The concept of option premiums has been around since the 17th century, when traders in Amsterdam began trading options on the Dutch East India Company. The option premium was initially used to protect traders from the risk of default on their contracts. In the 19th century, options were traded on the Chicago Board of Trade, and the concept of the option premium was further developed. Today, options are traded on exchanges around the world, and the option premium is an important part of the options trading process.

Comparison Table

Summary

An option premium is the price of an option contract, which is the right to buy or sell an underlying asset at a predetermined price. The option premium is composed of two parts: the intrinsic value and the time value. The intrinsic value is the difference between the underlying asset’s price and the strike price of the option. The time value is the amount of money that the option is worth beyond the intrinsic value, and is based on the amount of time remaining until the option expires. For more information about option premiums, you can visit websites such as Investopedia, The Balance, and Investing.com.

See Also

• Option Strike Price
• Option Expiration Date
• Option Intrinsic Value
• Option Time Value
• Option Moneyness
• Option Delta
• Option Gamma
• Option Theta
• Option Vega
• Option Rho

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