PREMIUM
Premium is the price that the buyer of an option, whether call or put, pays to the writer of the option, for the rights conveyed by the option. The premium of the option is a function of variables, such as:
- Current stock price,
- Strike price,
- Time to expiration,
- Volatility of stock, and
- Interest rates.
The buyer pays the premium to the seller, which belongs to the seller whether the option is exercised, or not. If the owner of an option decided not to exercise the option, the option expires and becomes worthless. The premium becomes the profit of the option writer, while if the option is exercised; the premium gets adjusted against the loss that the writer incurs upon such exercise.
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