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What is the premium in options?
The premium is the price of an option. It's quoted per share, and one contract is 100 shares, so a $1.00 premium is $100. The buyer pays it. The seller keeps it, whatever happens next.
The short answer
The Option premium is what an option costs. The buyer pays it to the seller when the trade fills. It's quoted per share, so a premium of $1.00 means $100 for one contract, because one contract covers 100 shares.
For the seller, the premium is the pay for taking on a promise. It's paid in advance and it's never returned.
Per share, times 100
| Quoted premium | What the seller collects | What the buyer pays |
|---|---|---|
| $0.25 | $25 | $25 |
| $1.00 | $100 | $100 |
| $2.50 | $250 | $250 |
| $5.00 | $500 | $500 |
That ×100 is the thing to get used to. The chain shows "1.00"; your account shows $100. See why one contract means 100 shares.
What sets the premium
Three things, in plain words:
- How far the strike is from the stock price. A strike close to the price costs more; one far away costs less. An option already in the money includes that built-in value too.
- How much time is left. More days, more premium. Each day that passes melts a little off. That melt is Theta.
- How much the market expects the stock to move. That's Implied volatility. A stock the market expects to swing hard has expensive options. A calm one has cheap options.
So a big premium is never free money. It's big because the strike is close, the time is long, or the market expects a big move. Often it's the third.
One example (an illustration, not a trade idea)
A made-up stock, XYZ, is at $50. A 30-day $45 put shows a bid of $1.00. You sell it and collect $100. Your broker sets aside $4,500.
| XYZ at expiry | What happens | Result |
|---|---|---|
| $55 | Put expires | +$100 (the premium, all of it) |
| $45 | Put usually expires | +$100 |
| $42 | Assigned: buy 100 at $45, worth $42 | −$300 + $100 = −$200 |
| $35 | Assigned at $45, worth $35 | −$1,000 + $100 = −$900 |
The premium is the most the seller can make. It isn't a cushion against much: at $35 it covered $100 of a $1,000 drop. That is a math example, not a promise.
Bid, ask and the premium you actually get
The chain shows two prices. The bid is what buyers will pay right now. The ask is what sellers want. As a seller, a market order gets you the bid. A limit order near the middle often fills a little better.
On a thin option, the gap between the two can be a big share of a small premium. That gap is a cost. See how the bid-ask spread taxes option sellers.
Why sellers care about it more than buyers do
A buyer hopes the option will be worth more than the premium later. A seller hopes it will be worth less, ideally zero. That's the whole trade in the wheel strategy: collect a premium for a promise you're glad to keep, and let time melt it.
The premium is also the seller's break-even cushion. Sell a $45 put for $1.00, and the shares cost you $44 net if assigned. Small, but real.
Questions
Is the premium paid right away?
Yes. The cash lands in the seller's account when the trade fills (it settles the next business day). It's never paid back, even if the seller is assigned.
Why is one option's premium so much higher than another's on the same stock?
Closer strike, more time, or both. On the same expiry, the difference between strikes is distance from the stock price.
Does a high premium mean a good trade for the seller?
Not on its own. A high premium usually means high implied volatility: the market expects a big move. The seller is being paid more because the risk is larger.
What's the difference between premium and profit?
The premium is what you collect. The profit is what's left after the option is closed, expired or assigned. If you're assigned and the stock has fallen, the premium is kept but the trade can still lose.
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