11.17What is a premium?
1What is it?
The price of an option, paid by the buyer to the seller. Premium = intrinsic value + time value.
2Why does it exist?
It compensates the seller for taking on risk.
3Calculation
Total premium = Premium per unit × Lot
- Premium ₹200 × 65 = ₹13,000 per lot.
Buyer pays ₹13,000; seller receives it (but takes on risk).
4Quick revision
- Option price.
- Intrinsic + time value.
- Buyer pays, seller receives.
5Knowledge check
Q1. Premium 150, lot 65. Cost?Show answer
₹9,750.
Q2. Two components of premium?Show answer
Intrinsic value and time value.
Q3. Who receives the premium?Show answer
The option seller.