What Is an Option Premium?

The option premium is the amount of money that an investor pays in order to secure a contract. When an individual investor purchases an option, it gives them the right to buy or sell a specific security. The purchase must be completed by a specified date in the future. In order to obtain that right, the investor has to pay a premium to the seller of the option.

The individual that writes the option contract gets to keep the option premium money, regardless of what happens to the option. If the investor that purchases the option does not choose to exercise the option, the option expires worthless. If the individual exercises the option, the seller of the option has to provide them with the securities at the agreed upon price. However, even if this happens, the option seller gets to keep the option premium. For many involved in this industry, option premiums are a source of income that can help to manage their portfolio. 

When you are trading options on an option exchange, the option premium will be the price that you have to pay for the option. This value will get smaller as the option gets closer to the expiration date.

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