What are Option Premiums?
Option premiums are similar to the premiums you pay when you purchase auto or home insurance. Similar to insurance, you use options to insure against adverse price movements. The cost of this option is referred to as the option's premium.
The cost of an option
- Quoted in cents/lb for dairy products
- Varies from minute-to-minute as the underlying futures price changes
- You pay the premium regardless of whether you exercise the option
- Composed of two components of the options: intrinsic value and time-value
- Remember that each option has two defining characteristics: month and strike price