What is Option Premium?

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An option premium is the current market price of an option contract. It is thus the income received by the seller (writer) of an option contract to another party. In-the-money option premiums are composed of two factors: intrinsic and extrinsic value. Out-of-the-money options premiums consist solely of extrinsic value.For stock options, the premium is quoted as a dollar amount per share, and most contracts represent the commitment of 100 shares.

Definition

The option premium is the current market price of an options contract. It is the income received by the seller (writer) of the options contract from the buyer. The option premium consists of intrinsic value and time value.

Origin

The concept of option premium developed alongside the growth of the options market. Options trading dates back to the 17th century during the Dutch tulip mania, but the modern options market rapidly expanded after the Chicago Board Options Exchange was established in 1973.

Categories and Features

Option premiums can be categorized into in-the-money and out-of-the-money options. In-the-money options have premiums composed of intrinsic value and time value, while out-of-the-money options have premiums consisting only of time value. Premiums are typically quoted in dollar amounts per share, with most contracts representing a commitment of 100 shares.

Case Studies

A typical example is the stock options of Apple Inc. Suppose Apple's stock is currently priced at $150, and an investor buys a call option with a strike price of $140, with a premium of $15. This option is in-the-money because the strike price is below the market price, and the premium includes intrinsic value ($10) and time value ($5). Another example is Tesla Inc.'s stock options. Suppose Tesla's stock is currently priced at $700, and an investor buys a call option with a strike price of $750, with a premium of $20. This option is out-of-the-money because the strike price is above the market price, and the premium consists only of time value.

Common Issues

Investors often misunderstand the composition of option premiums, particularly the difference between intrinsic value and time value. Another common issue is neglecting the impact of time value, especially as the option approaches expiration, when time value can rapidly diminish.

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Lisbon Treaty

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Labor Intensive

The term "labor-intensive" refers to a process or industry that requires a large amount of labor to produce its goods or services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods or services: the higher the proportion of labor costs required, the more labor-intensive the business.

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Fast-Moving Consumer Goods

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Negotiable Instruments

A negotiable instrument is a signed document that promises a payment to a specified person or assignee. In other words, it is a formalized type of IOU: A transferable, signed document that promises to pay the bearer a sum of money at a future date or on-demand.Common examples of negotiable instruments include personal checks, cashier's checks, money orders, certificates of deposit (CDs), promissory notes, and traveler's checks. The person receiving the payment, known as the payee, must be named or otherwise indicated on the instrument. Because they are transferable and assignable, some negotiable instruments may trade on a secondary market.

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Renewable Resource

A renewable resource is a resource that can be replenished naturally over time. As a result, it is sustainable despite its consumption by humankind.Renewable resources for the production of energy are considered especially important for their potential to replace non-renewable, or finite, resources. Additionally, renewable resources can offer cleaner energy solutions than those provided by non-renewable resources such as coal and fossil fuels.Examples of renewable resources include the sun, wind, water, the earth's heat (geothermal), and biomass.

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Feasibility Study

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