An option premium is the price an investor pays to the seller to buy an option contract. It is essentially the cost of obtaining the rights granted by the option. It is determined by various factors such as the underlying asset’s price, the strike price of the option, the time until expiration, and the volatility of the underlying asset.
Related Questions
1. How is the option premium determined?
The option premium is determined by several factors, including the price of the underlying asset, the strike price, the time until expiration, and the volatility of the underlying asset. Market conditions and interest rates may also affect the premium.
2. Is the option premium refundable?
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No, the option premium is not refundable. Once paid, it becomes the seller’s possession regardless of whether the option is exercised.
3. Who receives the option premium?
The option premium is received by the option seller. It’s a form of compensation for the risk they bear in offering the option contract.
4. What happens if I don’t exercise an option?
For a call option, if the option is not exercised by the expiration date, the contract becomes worthless. You lose the premium paid and the contract ends. For a put option, if it isn’t exercised, you still lose the premium paid, but your losses aren’t more than that amount.
5. What factors affect the value of an option premium?
Several factors affect the value of an option premium: the underlying asset’s price, the strike price, the time until expiration, the volatility of the underlying asset, and market conditions. Higher volatility and longer durations typically result in higher premiums, and vice versa.