What is an option premium?
In one line: An option premium is the price of an options contract, quoted per share; the buyer pays it to the seller when the trade fills, and the seller keeps it whatever happens next.
How it works
The premium is what an option costs. It's quoted per share, but one contract covers 100 shares. So a quote of $1.00 means you pay, or collect, $100.
The buyer pays the premium. The seller receives it. When you sell an option, the cash lands in your account as soon as the order fills. It stays yours whether the option expires, gets closed or gets assigned.
That's why sellers like it. You're paid up front for making a promise. A Put option seller promises to buy 100 shares at the Strike price. A Covered call seller promises to sell them.
The premium has two parts. Intrinsic value is the part the option is worth right now if it were used today. Extrinsic value is everything else: the price of time and of the chance of a big move. Sellers mostly collect the second part.
What moves the premium: the stock's price, the strike, the time left, and how jumpy the market expects the stock to be (Implied volatility).
An example (hypothetical)
XYZ trades at $50 (an illustration, not a trade idea). You sell one 30-day $45 put. The quote is $1.00, so you collect $100 today. That $100 is yours from this moment on.
| XYZ at expiry | What happens | Your result |
|---|---|---|
| $55 | Put expires. You keep the $100 | +$100 |
| $45 | Put usually expires. You keep the $100 | +$100 |
| $42 | Assigned: you buy at $45, worth $42 | −$300 + $100 = −$200 |
| $35 | Assigned at $45, worth $35 | −$1,000 + $100 = −$900 |
You keep the premium in every row. But "keeping it" isn't the same as making money. In the last two rows, the shares lose more than the premium paid you.
Why it matters for sellers
The premium is the most you can make on the option. The loss can be much bigger. So a big premium isn't a gift. It's the market telling you it sees a bigger chance of a big move.
Read the premium next to the risk. Ask: "How much am I paid, and what am I agreeing to if this goes wrong?" In the wheel strategy, you collect a premium on every step, so this question comes up every time.
Also check the bid and the ask. You usually sell somewhere between them. A wide gap means part of the premium is lost the moment you trade.
Questions
Is the option premium per share or per contract?
Quotes are per share. One standard contract covers 100 shares, so multiply the quote by 100 to get the dollars.
Do I keep the premium if I get assigned?
Yes. The premium is yours once the sale fills. Assignment changes what happens with the shares, not the premium you already collected.
Why are some premiums so much higher than others?
More time, a strike closer to the price, or a stock the market expects to move a lot all raise the premium. A high premium usually means a higher chance of being assigned or of a big loss.
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