# Option premium

> The price an options buyer pays the seller for a contract, made up of intrinsic value plus time value.

Source: https://www.quantisnow.com/glossary/option-premium
Topic: Glossary / Options
Also known as: options premium, option price
Last updated: 2026-10-27

An option premium is the price the buyer of an options contract pays the seller. It is quoted per share, so a premium of $2.40 on a standard 100-share equity contract costs $240.

## How it works

Every premium breaks into two parts:

- **Intrinsic value:** what the option would be worth if exercised right now. For a call, stock price minus strike; for a put, strike minus stock price; never below zero.
- **Extrinsic (time) value:** everything above intrinsic value. It reflects the chance the option gains value before expiration and shrinks to zero by expiration day.

Pricing models such as Black-Scholes derive the premium from the stock price, strike, time to expiration, interest rates, expected dividends and [implied volatility](https://www.quantisnow.com/glossary/implied-volatility). Of those, volatility is the input traders argue about most, because it is the only one not directly observable.

## Why it matters for traders

The premium is the full risk for a buyer and the maximum reward for a seller. Premiums inflate ahead of known catalysts such as earnings or an FDA decision, because the market prices in a larger move. Once the event passes, the time value can collapse in an [IV crush](https://www.quantisnow.com/glossary/iv-crush), so a buyer can be right on direction and still lose money. Sellers, by contrast, collect that inflated premium but take on the risk of an outsized move.

Wide bid-ask spreads on the premium are a hidden cost, especially in thinly traded strikes.

## Example

Northwind Therapeutics (NWTX) trades at $42. The $40 call expiring in 45 days is quoted at $3.10.

- Intrinsic value: $42 - $40 = $2.00
- Time value: $3.10 - $2.00 = $1.10
- Cost of one contract: $310

If NWTX is still at $42 on expiration day, the call is worth only its $2.00 intrinsic value, and the buyer loses the $1.10 of time value ($110).

## FAQ

### Who receives the option premium?

The seller (writer) of the option. They keep it whether or not the option is later exercised.

### Why is an option premium higher before earnings?

Implied volatility rises before earnings because the market expects a bigger price move, and higher implied volatility means a higher premium.

## Related terms

- [Call option](https://www.quantisnow.com/glossary/call-option.md): A contract giving the buyer the right, but not the obligation, to buy a stock at a set price on or before a set date.
- [Put option](https://www.quantisnow.com/glossary/put-option.md): A contract giving the buyer the right, but not the obligation, to sell a stock at a set price on or before a set date.
- [Implied volatility (IV)](https://www.quantisnow.com/glossary/implied-volatility.md): The market's forecast of how much a stock will move, expressed as an annualized percentage and backed out of current option prices.
- [Theta](https://www.quantisnow.com/glossary/theta.md): The estimated amount an option loses in value each day from the passage of time, with all other factors held constant.
- [In the money (ITM)](https://www.quantisnow.com/glossary/in-the-money.md): Describes an option with intrinsic value: a call whose strike is below the stock price, or a put whose strike is above it.
- [IV crush](https://www.quantisnow.com/glossary/iv-crush.md): The sharp drop in implied volatility, and in option prices, that typically follows a scheduled event like earnings or an FDA decision.

## On Quantisnow

- [Options chains](https://www.quantisnow.com/options)
- [Options chain basics](https://www.quantisnow.com/guides/options-chain-basics)
- [Options chains](https://www.quantisnow.com/docs/options-chains)
- [Options profit calculator](https://www.quantisnow.com/tools/options-profit-calculator)