Part 4 Institutional Trading

Option Premiums and Pricing

The premium is the price paid to purchase an option. It depends on factors like the asset’s price, volatility, time to expiration, and strike price. Higher volatility or longer duration increases the premium because of greater potential movement. The premium consists of intrinsic value (real profit potential) and time value (expectation of future movement). Sellers receive this premium as income, while buyers pay it as the cost of opportunity. Understanding premium components helps traders evaluate whether an option is over- or underpriced before entering trades.