Option Premium
Also called: premium, option price, option premium, LTP of an option.
Formula
Premium = Intrinsic value + Time value. Money paid = Premium x Lot size x Number of lots.
How it is read
A premium is the sum of two parts that behave differently. So two options at the same price can be completely different arrangements. One can be almost entirely intrinsic value. That only changes when the underlying does. Another can be almost entirely time value. That erodes every day regardless. Reading a premium therefore usually means splitting it first. Several statutory charges in the options segment are also levied on the premium. So the cost of trading an option scales with the premium. It does not scale with the contract's notional value.
What it does not tell you
On its own the premium says nothing about whether an option is expensive or cheap in any meaningful sense. A low premium usually reflects a low probability of finishing with intrinsic value. It is not a bargain. A quoted premium is also a last traded price. On an illiquid strike that can be stale. It can be far from where the contract would actually trade. The premium also moves for reasons other than the underlying's direction. Time passing moves it. Changes in implied volatility move it too. Both can happen while the underlying stands still.
See it in an experiment
Change one input in Market X-Ray and watch what happens.
Market X-Ray: Expiry — What remains when an option reaches expiry?
Related concepts
What an Option Premium Is Made Of: Intrinsic Value and Time Value
An option's premium is two different things added together. Intrinsic value is what the option would be worth if it expired right now. That is pure arithmetic on the strike and the current level, and never less than zero. Time value is everything else: the amount paid for the chance that the underlying moves further before expiry. Intrinsic value moves only when the underlying moves. Time value shrinks every day regardless, and is exactly zero at expiry.
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