CONCEPT EXPLAINER · 1:20
Option Premium — Concept Explainer Video
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The premium is the option price agreed by buyer and seller. It compensates the seller for taking the contract obligation. Receiving premium is an opening cash flow, not a guarantee that the position will finish with a profit.
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Transcript
The price of the option
The premium is the option price agreed by buyer and seller. It compensates the seller for taking the contract obligation. Receiving premium is an opening cash flow, not a guarantee that the position will finish with a profit.
Multiply the quote
A stock option quoted at two dollars fifty is usually quoted per share. With a standard one hundred share multiplier, one contract costs two hundred fifty dollars before fees. Three contracts cost seven hundred fifty. Adjusted contracts can use different deliverables.
Several forces shape the price
Premium changes with the underlying, strike, time remaining, implied volatility, interest rates, and dividends. Supply, demand, and bid ask spreads influence actual trading prices. A theoretical calculator value is therefore not necessarily an executable quote.
Paying versus collecting
A purchased option can lose its entire premium. A seller can lose more than the premium received, and an uncovered stock call has unlimited potential loss. Do not confuse a small credit with a small obligation.
Compare in actual dollars
Read the quote unit, multiplier, number of contracts, bid ask spread, and fees. Then ask what must happen for the position to profit. Premium is the entry price of the deal; it is not the entire risk calculation.
Video credits
Narration: AI-generated voice (Cedar).
Music: "Lotus" by Kevin MacLeod (incompetech.com) Source: https://incompetech.com/music/royalty-free/index.html?isrc=USUAN1900019 Licensed under Creative Commons Attribution 4.0: https://creativecommons.org/licenses/by/4.0/ Changes: excerpted or looped, equalized, lowered beneath narration, faded in and out.