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The premium is what you pay. Understanding what drives it is the difference between buying overpriced options that decay to nothing and finding good deals. Two options on the same stock with the same strike can cost wildly different amounts depending on expiration and volatility.
Calculate premium cost and P&L for any option.
Open Options CalculatorPremium = Intrinsic Value + Time Value
| Component | Definition | Example (Stock at $108, $100 Call at $12) |
|---|---|---|
| Intrinsic value | Option value if exercised right now | $108 - $100 = $8 intrinsic |
| Time value | Extra premium for time remaining | $12 - $8 = $4 time value |
| Total premium | What you pay | $12.00 ($1,200 per contract) |
| Moneyness | Call Example (Stock at $100) | Premium Range | Intrinsic Value |
|---|---|---|---|
| Deep in-the-money | $80 strike call | $22-$25 | $20+ |
| In-the-money | $95 strike call | $8-$12 | $5+ |
| At-the-money | $100 strike call | $4-$7 | $0 |
| Out-of-the-money | $105 strike call | $1-$3 | $0 |
| Far out-of-the-money | $115 strike call | $0.10-$0.50 | $0 |
Closer to the money = more expensive but higher probability of profit. Far OTM = cheap but very unlikely to profit.
| Days to Expiry | Approx. Premium ($100 ATM Call) | Daily Time Decay |
|---|---|---|
| 90 days | $7.00 | $0.04/day |
| 60 days | $5.70 | $0.05/day |
| 45 days | $5.00 | $0.06/day |
| 30 days | $4.00 | $0.08/day |
| 14 days | $2.80 | $0.13/day |
| 7 days | $2.00 | $0.20/day |
| 3 days | $1.20 | $0.30/day |
| 1 day | $0.50 | $0.50/day |
Time decay accelerates dramatically in the last 2 weeks. This is why buying options with less than 14 days to expiration is risky — you are fighting accelerating decay.
IV is the single biggest factor that beginners overlook:
| IV Level | What It Means | Premium Effect | Example Scenario |
|---|---|---|---|
| Low (15-20%) | Market expects small stock moves | Cheap options | Stable blue chip, no catalysts |
| Normal (25-35%) | Typical expectations | Average pricing | Regular market conditions |
| High (40-60%) | Market expects large moves | Expensive options | Pre-earnings, pending FDA decision |
| Extreme (80%+) | Market expects massive moves | Very expensive | Meme stock mania, company crisis |
The trap: you buy a call before earnings when IV is 60%. Stock goes up 5% but IV drops from 60% to 30% after the announcement. The stock moved your way but the option lost value because time value collapsed. This is called "IV crush."
Minor factors for most retail traders. Higher interest rates slightly increase call premiums and decrease put premiums. Upcoming dividends slightly decrease call premiums because the stock drops by the dividend amount on the ex-date.
Understand the premium before you pay it.
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