The price paid by the buyer of an options contract to the seller (writer) for the right, but not the obligation, to buy or sell the underlying asset.
In derivatives trading, the premium is the price of an options contract — the amount the buyer pays to the seller (writer) to acquire the right to buy (call) or sell (put) the underlying asset at the Strike Price before or at expiry. The premium is the maximum loss for the option buyer and the maximum gain for the option seller.
Option premium consists of two components: intrinsic value and time value. Intrinsic value is the amount by which an option is "in the money" — for a call option, it is the current price minus the strike price (if positive). Time value represents the probability that the option could become more valuable before expiration. As expiry approaches, time value decays (theta decay), eventually reaching zero.
On NSE, where F&O trading is extremely active, option premiums are quoted per share but contracts are for a fixed lot size. For example, a Nifty 50 call option with a premium of INR 150 and a lot size of 50 would cost INR 7,500 per contract (150 x 50). Bank Nifty options, with their higher volatility, often carry larger premiums than Nifty options at similar moneyness levels.
Several factors affect option premium: the price of the underlying asset, Strike Price, time to expiry, Volatility (implied volatility is the single largest driver of premium changes), interest rates, and dividends. The Greeks (Delta, Gamma, Theta, Vega) quantify how sensitive the premium is to changes in each of these factors.
Understanding premium dynamics is essential for options traders in India. Weekly expiry options (available for Nifty and Bank Nifty) have rapid time decay, making them attractive for sellers but risky for buyers who need quick directional moves to profit.
India Context
NSE is one of the world's largest options markets by volume. Nifty and Bank Nifty options have weekly expiries. Premiums quoted per share; contracts are in fixed lot sizes.