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Glossary
Premium
Definition
In options trading, the premium refers to the option price, depending on the price of the underlying asset and the time remaining in the contract.
What is a premium?
In finance, a premium can refer to several things, but it commonly denotes the amount paid for an option or insurance policy above its intrinsic value or the amount paid above the nominal or face value of a security. It reflects the cost to obtain certain rights or protection.
Why are premiums important to consider when trading?
Premiums are important in options trading as they represent the cost to buy the option. The premium's size can indicate market volatility and the underlying asset's expected future movements. The premium amount is crucial for assessing the cost-benefit ratio of the coverage. Understanding premiums helps traders and investors make informed decisions about whether their strategies are cost effective.