Why does one option cost more than another? What is an option premium, and why does it matter for your trades? This article looks at how call option premium and put option premium are priced, what moves them, and why understanding options premium can improve your decisions as a trader.
KEY TAKEAWAYS
An options premium is the amount paid by the buyer and received by the seller to initiate an options contract
In finance, a premium is the price paid for a financial product or service; in options trading, it’s the cost to buy the rights an option provides
Call option premium typically rises as the stock price increases, while put option premium goes up when the stock price falls, all else being equal
Time to expiration, implied volatility, and how far in or out of the money the option is are the main factors that influence the premium
What Is an Option Premium?
In finance, a premium refers to an extra cost or price paid above the usual or face value of an asset, or for a service or feature. The options premium is the price paid to buy an options contract. It reflects the market’s expectations for the stock and the contract’s terms. Buyers pay the premium upfront, while sellers receive it as income. Options premiums are quoted per share, so a $2 premium equals $200 per contract (100 shares). The total premium has two parts:
Intrinsic value: the profit if exercised now
Time value: the potential for gain before expiration
A simple option premium example can help make this clearer: if a contract has $2 of intrinsic value and $1 of time value, the total premium is $3.
This applies to both call option premium and put option premium. Many traders use an options screener to quickly compare call and put premiums across different stocks and expirations, helping them spot opportunities faster.
The following infographic summarizes the main things to know about how options premiums work:
Factors that Influence Options Premium
The options premium moves with a few key factors. First is moneyness, which translates into how close the stock price is to the strike. The deeper in-the-money it is, the more intrinsic value it has. Time value drops as the contract gets closer to expiration. Implied volatility also matters: more volatility means higher premiums because there’s a greater chance of a big move.
Other factors include:
Interest rates (which can slightly affect pricing models)
Expected dividends before expiration
Market sentiment or supply and demand for a specific contract
This applies whether you’re trading a call option premium or a put option premium.
Call Option Premium vs. Put Option Premium
Call and put options are priced differently based on how the stock moves. The call option premium usually increases when the stock price rises, all else being equal. That’s because calls give the right to buy the stock, so they become more valuable as the stock climbs. In contrast, the put option premium tends to go up when the stock price falls, since puts gain value when selling at a higher strike becomes more attractive.
Both are still influenced by the same three factors:
How far the strike is from the current price (moneyness)
Time left until expiration
Implied volatility
If you're comparing two contracts with similar specs, a good option premium example would show that a call on a rising stock and a put on a falling stock both increase in value. Understanding what an option premium is and how it responds to price movement helps you better plan your trade entries and exits.
Gianluca Longinotti is an experienced trader, advisor, and financial analyst with over a decade of professional experience in the banking sector, trading, and investment services.
Leav Graves is the founder and CEO of Option Samurai and a licensed investment professional with over 19 years of trading experience, including working professionally through the 2008 financial crisis.
Gianluca LonginottiFinance Writer - Traders Education
Leav GravesCEO