Premiums

What is option “premium”?
The premium is the price at which an option trades, and is paid by the buyer to the writer (seller) of the contract. The premium paid by the buyer is non-refundable payment for the rights inherent in the long contract. The writer (seller) of an option contract keeps the premium received, whether assigned or not, and is in turn obligated to fulfill the short contract’s obligations if assignment is received. The two components of an option?s total premium are intrinsic value and time value.

Intrinsic Value
Intrinsic value represents the amount, if any, by which an option contract is in-the-money. By definition, at- and out-of-the-money options do not have intrinsic value.

Time Value
Time value represents the portion of an option’s total premium that exceeds its intrinsic value, if it has any. By definition, the premium of at- and out-of-the-money options is entirely time value.

What is “time decay”?
Time decay (or time “erosion”) is the inevitable phenomenon of decay, or decrease, of an option premium’s time value due to the passage of time. The rate of this decay increases as expiration approaches. At expiration a call or put is worth only its intrinsic value, if it has any.

You entered an order to buy a call option for $3.25 but your brokerage firm rejected the price?
As an industry standard, most option contracts traded at prices greater than $3.00 must trade in $0.10 (10¢) increments. Therefore, the purchase price for this buy order must be either $3.20 or $3.30. For prices under $3.00 the increments may be $0.05 (5¢)