What Is Options Premium? How Option Prices Are Determined
Understand the components of options premium and what drives option prices up and down.
What is Options Premium?
Options Premium is the price you pay to buy an option (or receive when selling). It represents the market's best estimate of the option's value.
Premium = Intrinsic Value + Extrinsic Value (Time Value). Premium is quoted per share but you pay per contract (100 shares).
TL;DR - Quick Answer
Premium = Intrinsic Value + Time Value. Affected by: stock price, strike, time to expiration, volatility, interest rates. Higher IV = higher premiums. More time = higher premiums. A $2 option costs $200 (× 100 shares).
What Is Options Premium?
The premium is simply the price of an option. When you see an option quoted at $3.50, that means $3.50 per share, or $350 per contract (100 shares).
Premium is what buyers pay and sellers receive. It's determined by supply and demand, but market makers use pricing models to ensure fair prices.
Premium Components
Premium = Intrinsic Value + Extrinsic Value
Intrinsic Value
The "real" value if exercised now. Only ITM options have intrinsic value.
Call intrinsic = Stock Price - Strike (if positive)
Put intrinsic = Strike - Stock Price (if positive)
Extrinsic Value (Time Value)
Everything else—the possibility that the option could become more valuable before expiration.
What Affects Premium?
- Stock Price: Higher stock = higher call premium, lower put premium
- Strike Price: ITM options cost more than OTM
- Time to Expiration: More time = higher premium
- Implied Volatility: Higher IV = higher premium (biggest factor)
- Interest Rates: Minor effect, slightly increases call premium
- Dividends: Decrease call premium, increase put premium
Key Takeaways
- Premium = Intrinsic + Extrinsic (Time) Value
- Implied volatility is the biggest driver of premium
- Premium quoted per share, paid per contract (×100)
- Time value decays as expiration approaches
Related Options Strategies
Intrinsic vs Extrinsic
Breaking down premium components.
Implied Volatility
The biggest premium driver.
Understanding related strategies helps you choose the best approach for your market outlook and risk tolerance. Each strategy has unique characteristics that make it suitable for different market conditions.
Ready to continue learning?
Explore more topics in our Learning Center or try our free demo.