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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options

In the options market, the term 'option premium' refers to which of the following?

Option premium is the price the option buyer pays to the option seller (writer) for the right granted by the contract. It is not margin, brokerage or the spot-strike difference; those are separate concepts. The writer keeps the premium as compensation for taking on the obligation.

  1. AThe price paid by the option buyer to the option seller for the rights conferred by the optionCorrect
  2. BThe margin deposited by the option seller with the clearing corporation
  3. CThe difference between the spot price and the strike price on expiry
  4. DThe brokerage charged by the trading member on an option trade

Explanation

The premium is the price the buyer pays the writer for acquiring the right under the option. Margin is a security deposit collected from sellers, not the premium. The spot-strike difference on expiry is the intrinsic value or settlement amount, and brokerage is a transaction cost.

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