Premium
The price paid for an options contract.
Also called: option price · option premium
Written by Javier Sánchez Ros
In plain language
Premium is what the buyer pays and the seller collects. It is quoted per share, so a $2.40 premium on a standard 100-share contract costs $240.
It has two components: intrinsic value, the amount already in the money, and extrinsic value, which reflects remaining time and implied volatility.
For a buyer, the premium is the entire risk. For a seller, it is the entire maximum profit — while the risk can be far larger.
The formula
Option Premium
Intrinsic Value + Extrinsic Value
- Contract cost
- Premium × 100 (standard US equity contract)
Worked through
Why a $3.10 option costs $310
- Quoted premium
- $3.10
- Contract multiplier
- 100
- Cost per contract
- $310
- Five contracts
- $1,550
Premiums are quoted per share and options are sold per hundred, so every number on the screen is a hundredth of what leaves the account. It is the single most common arithmetic error new options traders make, and it is off by two orders of magnitude.
Once the multiplier is applied, the sizing is straightforward. Premium times 100 is the maximum loss per contract, so the risk budget divided by that figure is the number of contracts — no stop distance, no slippage, no gap adjustment.
What the premium is made of matters for what happens next. Part of it is intrinsic value, which is real and survives to expiry; the rest is extrinsic, which decays to zero on a schedule. Paying $3.10 for a contract with no intrinsic value is buying something that is guaranteed to be worthless if nothing happens.
The bid-ask spread deserves a mention too. Options spreads are much wider than stock spreads, and a 15-cent spread is $15 per contract on the way in and again on the way out — a meaningful share of a small premium.
Why it matters
For long options the premium is your maximum risk, which makes it the number you divide your risk budget by to get contract count.
Common mistakes
- Forgetting the 100x multiplier and buying ten times the intended exposure.
- Paying inflated premium into an event where implied volatility collapses immediately after.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The portion of an option’s premium that would be realized if exercised right now.
The part of an option’s premium beyond intrinsic value, reflecting time and volatility.
The market’s expectation of future price movement, derived from option prices.
How much value an option loses per day purely from the passage of time.
The amount of an asset you buy or sell in a single trade.