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Premium
The option premium is the market price paid by the buyer and received by the seller, quoted per share.
Lesson · Options Trading
Option Premium
Break an option premium into intrinsic and extrinsic value and observe how stock price, time to expiration, and implied volatility affect a simplified theoretical estimate.
Synthetic educational examples
Core concepts
A premium is intrinsic value plus everything else; the split is what the rest of the course works on.
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Intrinsic value
Intrinsic value is the amount the option is in-the-money and cannot be negative.
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Extrinsic value
Extrinsic value is premium above intrinsic value. It is priced chiefly by the time remaining (Expiration and Time Decay) and by implied volatility, the model’s assumption about how much the stock might move (Implied Volatility).
Worked example
The 100 call with the stock at $108, 30 days left and IV at 30%, priced by the model this page uses.
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Intrinsic value: max(108 − 100, 0) = $8.00.Stock minus strike for a call. It cannot be negative, and it is the same whatever the time or volatility.
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Model premium: $9.20.Set stock 108, strike 100, 30 days, 30% in the lab, or read the cyan curve at $108. A real quote would differ; the split works the same way.
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Extrinsic value: 9.20 − 8.00 = $1.20.What 30 days of possible further movement is priced at. Move the IV slider and only this part changes.
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At expiration with the stock still $108: $8.00.The $1.20 is what the clock removes. The purple line on the chart is that expiration value at every stock price.
Interactive lesson
Change stock, strike, time and volatility and watch the premium split between the two bars.
IntrinsicExtrinsic
Theoretical premium$1.67
Intrinsic value$0.00
Extrinsic value$1.67
Expiration value now$0.00
Decompose an option premium
Separate current exercise value from all remaining value.
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Calculate intrinsic value
Use the call or put intrinsic formula from the stock and strike.
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Read the full premium
Use an executable quote when trading; theoretical value is only a reference.
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Subtract intrinsic
Premium minus intrinsic gives extrinsic value.
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Identify the drivers
Time, implied volatility, rates, dividends, and market supply and demand can affect extrinsic value.
Premium components
Lesson rule
Common mistakes
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Calling all premium time valueAn ITM option can contain both intrinsic and extrinsic value.
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Assuming theoretical value is a fill priceA model does not guarantee a bid, ask, or execution.
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Forgetting the multiplierPremium per share must normally be multiplied by 100 per standard contract.
Completion standard
✓
Finish when you can split any quoted premium into intrinsic and extrinsic value from the stock and strike alone, and say which part expiration removes.
The drill asks for the split both ways round — an option with intrinsic value and one without — and for what is left at expiration.
Model scope: Theoretical values use a simplified European Black–Scholes model with a fixed 4.5% annual rate and no dividend input, so a number here can be reproduced in any calculator that takes those inputs. Listed products, early exercise, dividends, spreads, fees, and market conditions can produce different prices and outcomes.