What It Means
Premium is the price you pay to buy an option, or the price you receive if you sell one. It's quoted per share, not per lot, so the actual cash that changes hands is the premium multiplied by the lot size.
How It Works
Premium has two components: intrinsic value (what the option would be worth if exercised right now) and time value (what you're paying for the chance the price moves further in your favor before expiry). Time value shrinks every day and hits zero at expiry, which is why premiums fall as expiry approaches even if the underlying hasn't moved.
Example
Suppose a Nifty ₹25,000 call is trading at a premium of ₹150. With Nifty's lot size at the time of writing (65), buying 1 lot costs ₹150 × 65 = ₹9,750. If Nifty settles at ₹25,300 at expiry, that option is worth ₹300 per share (all intrinsic value now, since there's no time left), or ₹19,500 for the lot, a profit of ₹9,750 before costs.
Warning
A lower premium doesn't mean an option is "cheaper" in any useful sense. It usually just means the strike is far from the current price, so the odds of it paying off are lower too.
Related Terms
- Call Option — one of the two contract types premium is paid for
- Put Option — the other
- Strike Price — the fixed price that determines how much of the premium is intrinsic value