Options premium is the cash you collect when you sell an option. Understanding what it is made of tells you when to sell it and why it shrinks.
What Is Options Premium?
Premium is the price a buyer pays a seller for an option. As a seller, you collect that premium up front. It is your income — and your obligation is to deliver on the contract if assigned.
Intrinsic vs Extrinsic Value
Premium has two parts. Intrinsic value is real value the option already has in-the-money. Extrinsic value is everything else — the price of time and uncertainty. When you sell premium, you are primarily selling extrinsic value, and time decay erodes it toward zero.
Selling Premium = Selling Time
Because extrinsic value decays as expiration approaches, premium sellers profit from the passage of time. Every day that passes without a move against you shrinks the premium — and that decay is what you capture as income.
Key Takeaways
- Premium = intrinsic value + extrinsic value.
- Sellers profit from the decay of extrinsic value.
- Time is the premium seller’s edge.