The premium: what you pay and what you sell

The premium is the number everything in options turns on: it is what changes hands, it bounds the risk on both sides, and its size is set by forces - time, volatility - that shares never had. This lesson fixes what it is; the module unpacks what sets it.

What the premium is

• The buyer's maximum loss: a bought option's entire risk is the premium paid - the asymmetry's good half, and the number that makes a long option's downside knowable exactly.
• The seller's maximum gain: a sold option's entire reward is the premium received - the asymmetry's other half, the fixed income against an open risk.
• The hurdle: a bought option only pays if the underlying moves enough to cover the premium - the breakeven of lesson 8 - so the premium is the distance the view must travel before it profits.

The contract multiplier

Premiums are quoted per share of the underlying, and a contract covers a fixed number of shares - so the cash premium is the quote times the multiplier, and reading a premium means applying the multiplier the way the futures track applied the point value. A premium quoted as a small per-share figure is a larger cash amount per contract, and the position's real risk and cost are the cash figure - the same per-unit-to-cash discipline every track has taught, on the option's own multiplier.

Why the premium is most of the subject

A share's price is just its price; an option's premium is a computed value with parts - what the option is worth if exercised now (intrinsic), plus what the remaining time and the underlying's volatility are worth (time value) - and those parts move differently, decay differently, and respond differently to the underlying. The rest of module 1 takes the premium apart: intrinsic and time value (lesson 4), how time decays it (lesson 5), how volatility inflates it (lesson 6), and how it all resolves at expiry (lesson 7). The premium is where options stop resembling shares - and understanding it is understanding the instrument.