Legal Definitions - option premium

Option premium refers to the price paid by an investor to purchase an option contract. An option contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time period.

For example, if an investor wants to buy a call option on a stock, they will pay a premium to the seller of the option. The premium is determined by various factors such as the current price of the stock, the strike price of the option, the time until expiration, and the volatility of the stock.

The option premium is the cost of buying the option and is similar to an insurance premium. The buyer pays the premium to the seller to protect against potential losses if the price of the underlying asset moves in an unfavorable direction.