what is an option premium 
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 1for stock options the premium is quoted as a dollar amount per share and most contracts represent the commitment of 100 shares investopedia jake shiunderstanding option premiuminvestors who write which means to sell in this case calls or puts use option premiums as a source of current income in line with a broader investment strategy to hedge all or a portion of a portfolio option prices quoted on an exchange such as the cboe options exchange cboe are considered premiums as a rule because the options themselves have no underlying value the components of an option premium include its intrinsic value its time value and the implied volatility of the underlying asset as the option nears its expiration date the time value will edge closer and closer to 0 while the intrinsic value will closely represent the difference between the underlying security s price and the strike price of the contract factors of option premiumthe main factors affecting an option s price are the underlying security s price moneyness useful life of the option and implied volatility as the price of the underlying security changes the option premium changes as the underlying security s price increases the premium of a call option increases but the premium of a put option decreases as the underlying security s price decreases the premium of a put option increases and the opposite is true for call options the moneyness affects the option s premium because it indicates how far away the underlying security price is from the specified strike price as an option becomes further in the money the option s premium normally increases conversely the option premium decreases as the option becomes further out of the money for example as an option becomes further out of the money the option premium loses intrinsic value and the value stems primarily from the time value the time until expiration or the useful life affects the time value portion of the option s premium as the option approaches its expiration date the option s premium stems mainly from the intrinsic value for example deep out of the money options that are expiring in one trading day would normally be worth 0 or very close to 0 implied volatility and option priceimplied volatility is derived from the option s price which is plugged into an option s pricing model to indicate how volatile a stock s price may be in the future moreover it affects the extrinsic value portion of option premiums if investors are long options an increase in implied volatility would add to the value this is because the greater the volatility of the underlying asset the more chances the option has of finishing in the money the opposite is true if implied volatility decreases for example assume an investor is long one call option with an annualized implied volatility of 20 therefore if the implied volatility increases to 50 during the option s life the call option premium would appreciate in value an option s vega is its change in premium given a 1 change in implied volatility 