GLOSSARY // Options
Option Premium
The premium is the price of an option — what the buyer pays and the seller collects, quoted per share. Multiply by 100 to get the actual cash: a $2.35 premium means $235 per contract.
Every premium splits into two parts: intrinsic value (what the option is worth if exercised right now) and extrinsic value (everything else — time and implied volatility). Sellers earn the premium up front and keep all of it if the option expires worthless, which is the entire business model of covered calls and credit spreads.
A stock trades at $102. Its 100 call is quoted at $4.00: $2.00 of that is intrinsic value ($102 - $100) and $2.00 is extrinsic. Buying it costs $400 per contract. The 105 call on the same stock might trade at $1.20 — all extrinsic, since it has no intrinsic value at all.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.