{"id":12234,"date":"2026-05-22T13:39:13","date_gmt":"2026-05-22T13:39:13","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/glossary\/premium\/"},"modified":"2026-05-22T13:39:13","modified_gmt":"2026-05-22T13:39:13","slug":"premium","status":"publish","type":"glossary","link":"https:\/\/lemonn.co.in\/blog\/glossary\/premium\/","title":{"rendered":"Premium"},"content":{"rendered":"<p>An option <a class=\"glossaryLink\"  href=\"https:\/\/lemonn.co.in\/blog\/glossary\/premium\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'  tabindex='0' role='link'>premium<\/a> is the price a buyer pays a seller to acquire the option contract. It is the single most important variable for an options trader because it determines profitability, <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/leverage\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">leverage<\/a>, and risk. Premium consists of two components &#x2014; <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/intrinsic-value\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">intrinsic value<\/a> and time value &#x2014; and is influenced by several pricing factors including the spot price, time to expiry, <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/volatility\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">volatility<\/a>, interest rates, and <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/dividend\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">dividend<\/a>s.<\/p>\n<div><strong>Key takeaways:<\/strong>\n<ul>\n<li>Premium = Intrinsic Value + Time Value.<\/li>\n<li>Intrinsic Value is positive only for ITM options.<\/li>\n<li>Time Value decays as expiry approaches (Theta).<\/li>\n<li><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/implied-volatility\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Implied Volatility<\/a> (IV) is the biggest swing factor for premiums.<\/li>\n<li>Premium is quoted per share\/unit; total cost = premium &times; <a class=\"glossaryLink\"  href=\"https:\/\/lemonn.co.in\/blog\/glossary\/lot-size\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'  tabindex='0' role='link'>lot size<\/a>.<\/li>\n<\/ul>\n<\/div>\n<h2 id=\"the-two-components-of-premium\">The two components of premium<\/h2>\n<ul>\n<li><strong>Intrinsic Value:<\/strong> For a call, max(spot &#x2212; strike, 0). For a put, max(strike &#x2212; spot, 0). Only ITM options have intrinsic value.<\/li>\n<li><strong>Time Value:<\/strong> Premium minus intrinsic value. Represents the &#x201C;optionality&#x201D; of remaining time. Always positive (or zero) and decreases as expiry nears.<\/li>\n<\/ul>\n<h2 id=\"what-drives-premium-pricing\">What drives premium pricing<\/h2>\n<table>\n<tr>\n<th>Factor<\/th>\n<th>Effect on call premium<\/th>\n<th>Effect on put premium<\/th>\n<\/tr>\n<tr>\n<td>Spot price &#x2191;<\/td>\n<td>&#x2191;<\/td>\n<td>&#x2193;<\/td>\n<\/tr>\n<tr>\n<td><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/strike-price\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Strike price<\/a> &#x2191;<\/td>\n<td>&#x2193;<\/td>\n<td>&#x2191;<\/td>\n<\/tr>\n<tr>\n<td>Time to expiry &#x2191;<\/td>\n<td>&#x2191;<\/td>\n<td>&#x2191;<\/td>\n<\/tr>\n<tr>\n<td>Implied volatility &#x2191;<\/td>\n<td>&#x2191;<\/td>\n<td>&#x2191;<\/td>\n<\/tr>\n<tr>\n<td>Interest rates &#x2191;<\/td>\n<td>&#x2191;<\/td>\n<td>&#x2193;<\/td>\n<\/tr>\n<tr>\n<td>Dividends &#x2191;<\/td>\n<td>&#x2193;<\/td>\n<td>&#x2191;<\/td>\n<\/tr>\n<\/table>\n<h2 id=\"time-decay-theta\">Time decay (Theta)<\/h2>\n<p>Time value erodes faster as expiry approaches. The decay is non-linear: an ATM weekly option loses a small portion of premium daily until the last 2&#x2013;3 days, when decay accelerates dramatically. Selling options near expiry is a popular strategy to harvest this &#x201C;Theta&#x201D;.<\/p>\n<h2 id=\"implied-volatility\">Implied volatility<\/h2>\n<p>IV reflects the market&#x2019;s expectation of future volatility. Rising IV pumps up premiums; falling IV crushes them. Major events (earnings, RBI policy, US Fed) often see IV spike before and crush after &#x2014; even when the underlying barely moves. Trade with awareness of IV regime to avoid surprises.<\/p>\n<h2 id=\"practical-example\">Practical example<\/h2>\n<p><a class=\"glossaryLink\"  href=\"https:\/\/lemonn.co.in\/blog\/glossary\/nifty\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'  tabindex='0' role='link'>Nifty<\/a> spot 22,000. 22,000 call (ATM, weekly expiry): premium &#8377;120. 22,100 call: &#8377;70. 21,900 call: &#8377;170 (intrinsic &#8377;100 + time value &#8377;70). The further the strike is OTM, the smaller the premium but the higher the percentage leverage.<\/p>\n<h2 id=\"how-to-read-premiums-smartly\">How to read premiums smartly<\/h2>\n<ul>\n<li>Compare premiums across strikes to gauge expected moves.<\/li>\n<li>Check IV percentile to know if options are cheap or expensive historically.<\/li>\n<li>Use <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/option-chain\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">option chain<\/a> analytics to find unusual premium spikes (often signal large block orders).<\/li>\n<li>Always compute total cost (premium &#xD7; lot) before placing a trade.<\/li>\n<\/ul>\n<h2 id=\"frequently-asked-questions\">Frequently asked questions<\/h2>\n<div>\n<h3 id=\"is-the-premium-the-same-as-the-strike-price\">Is the premium the same as the strike price?<\/h3>\n<p>No. Premium is the cost; strike is the contractual transaction price.<\/p>\n<h3 id=\"how-is-premium-settled\">How is premium settled?<\/h3>\n<p>Premium is paid upfront by the buyer when the trade is executed; the seller receives it immediately.<\/p>\n<h3 id=\"why-do-premiums-shrink-overnight-even-without-a-move\">Why do premiums shrink overnight even without a move?<\/h3>\n<p>Time decay (Theta) reduces premium daily. Implied volatility changes can also reduce premium.<\/p>\n<h3 id=\"are-premiums-refundable\">Are premiums refundable?<\/h3>\n<p>No. Once paid, the premium is non-refundable. Closing a position at a higher premium realises a profit; closing at a lower premium realises a loss.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>An option premium is the price a buyer pays a seller to acquire the option contract. It is the single most important variable for an options trader because it determines profitability, leverage, and risk. Premium consists of two components &#x2014; intrinsic value and time value &#x2014; and is influenced by several pricing factors including the [&#x2026;]<\/p>\n","protected":false},"author":3,"featured_media":0,"menu_order":0,"template":"","meta":{"_uag_custom_page_level_css":"","footnotes":""},"class_list":["post-12234","glossary","type-glossary","status-publish","hentry"],"blocksy_meta":[],"uagb_featured_image_src":{"full":false,"thumbnail":false,"medium":false,"medium_large":false,"large":false,"1536x1536":false,"2048x2048":false,"web-stories-poster-portrait":false,"web-stories-publisher-logo":false,"web-stories-thumbnail":false},"uagb_author_info":{"display_name":"Ashutosh","author_link":"https:\/\/lemonn.co.in\/blog\/author\/ashu\/"},"uagb_comment_info":0,"uagb_excerpt":"An option premium is the price a buyer pays a seller to acquire the option contract. It is the single most important variable for an options trader because it determines profitability, leverage, and risk. Premium consists of two components &#x2014; intrinsic value and time value &#x2014; and is influenced by several pricing factors including the&hellip;","_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/12234","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":0,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/12234\/revisions"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=12234"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}