What is option premium?
Derivatives
Option premium is the price a buyer pays to purchase an options contract, determined by factors like the underlying stock’s price, volatility, time to expiry and strike price.
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Premium has two components: intrinsic value (how far in-the-money the option is) and time value (reflecting time left until expiry and expected volatility). Time value erodes as expiry approaches, known as time decay, affecting prices even if the stock doesn’t move.
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