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

In the options market, what does the term 'option premium' refer to?

Option premium is the price the buyer pays to the writer for acquiring the right, but not the obligation, to buy or sell the underlying. It is not a margin deposit, brokerage or intrinsic value, and it is the buyer's maximum possible loss.

  1. AThe price paid by the option buyer to the option writer for acquiring the rightCorrect
  2. BThe margin deposited by the option buyer with the clearing corporation
  3. CThe difference between the spot price and the strike price on expiry
  4. DThe brokerage charged on an option trade

Explanation

The premium is the price of the option contract, paid by the buyer to the seller (writer) at the time of purchase. It is not margin, brokerage or intrinsic value. Margin is collected from writers, not from buyers, since the buyer's loss is limited to the premium.

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