Glossary
What is Option Premium? Meaning, Example & Why It Matters
The price an option buyer pays to the seller for the rights the option contract provides.
The premium is the market price of an option. The buyer pays it upfront, and the seller receives it. It is quoted per unit, so the total amount paid is the premium multiplied by the lot size. Premiums change constantly during the trading day as the underlying price, time to expiry and market volatility change.
Why Option Premium matters to you
A premium has two parts: intrinsic value, which is how much the option is in the money, and time value, which reflects the chance of further favourable movement before expiry. Time value shrinks as expiry approaches, a process called time decay. This is why an option buyer can lose money even if the underlying price stays flat.
Premium also drives many trading costs. For options, charges like STT and exchange transaction charges are often calculated on premium rather than on full contract value. This keeps per-trade costs relatively low in rupee terms, but frequent trading can still make them add up.
Practical tip: look beyond the absolute price of the premium. A ₹5 option is not necessarily cheaper than a ₹50 option in terms of risk; compare the probability of profit, liquidity and how fast time decay will erode the value before you decide.
Example: Illustrative only: if an option's premium is ₹20 and the lot size is 100 units, buying one lot costs ₹2,000 plus charges. If the premium rises to ₹30 and you sell, your gross profit is ₹1,000 before costs.
See it in rupees: every charge and tax on a real trade, at every broker. Open the brokerage calculator
Related terms
- GlossaryOptions
A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price before expiry.
- GlossaryStrike Price
The fixed price at which an option holder can buy (call) or sell (put) the underlying asset.
- GlossaryExpiry
The date on which a futures or options contract ends and is settled according to exchange rules.
- GlossaryOption Chain
A table showing all available call and put options for an underlying, with prices, volume and open interest by strike.
Frequently asked questions
Why does an option premium fall even if the stock does not move?
This is usually time decay. As expiry approaches, the time value part of the premium shrinks.
What affects the option premium most?
The underlying price, time to expiry, volatility and interest rates all affect premium, with price and volatility often having the biggest day-to-day impact.
Do I get the premium back at expiry?
No. The premium is paid to the seller. At expiry, you only receive any intrinsic value the option has, if it is in the money.