STSM112020 - Derivatives: introduction to options: premium

In order to acquire the rights given by an option, the purchasesr will almost always have to pay the writer or issuer of the option a fee. This fee is called the premium.

The premium represents the cost of a buy or sell option and is normally payable at the start of the contract. In return for receiving the premium, the writer of the option agrees to fulfil the terms of the option contract.

Irrespective of whether an option is ‘exercised’ (see STSM112050 ) by the holder or the option lapses (without exercise) at expiry of the option period, any premium paid is retained by the issuer of the option.