Options premium is the price you pay to buy an options contract (or receive if you sell one), quoted per share but costing 100 times that amount per contract. A $2.50 premium means a $250 total cost for one contract.
Premium is the single number every trader looks at first on an options chain — but understanding what's actually inside that number is what separates guessing from informed trading.
The Two Parts of Premium
Every dollar of premium is made up of two components:
- Intrinsic value — the amount the option would be worth if exercised immediately. Only in-the-money options have any (see what is a strike price for the ITM/OTM breakdown).
- Extrinsic value (also called time value) — everything else: the market's pricing-in of time remaining and implied volatility. This is the part that shrinks every day, a process covered in full in what is theta decay.
What Drives Premium Up or Down
| Factor | Effect on premium |
|---|---|
| Stock price moves toward the strike (calls) or in-the-money | Increases |
| More time until expiration | Increases |
| Less time until expiration | Decreases (theta decay) |
| Rising implied volatility | Increases |
| Falling implied volatility | Decreases |
This is why an option's price can move even when the stock itself hasn't — implied volatility and time decay are both constantly acting on premium independent of price direction. See what is implied volatility for more on that piece specifically.
Premium = Intrinsic Value + Extrinsic Value, and extrinsic value is shaped mainly by time-to-expiration and implied volatility — not just where the stock is trading.
Why Premium Decays
Every option is a wasting asset — its extrinsic value trends toward zero as expiration approaches, regardless of what the stock does, because there's simply less time left for anything to happen. This decay isn't linear: it's slow with weeks or months left, and accelerates sharply in the final days before expiration. Sellers of options collect this decay as their profit source; buyers are fighting against it.
See Premium Move in Real Time
ScalpCharts shows live intraday price action so you can watch how premium reacts to real market moves.
Open ScalpCharts