Option premium is the total price of an option contract. It's what you pay when you buy an option and what you receive when you sell one.
Option premiums are quoted per share, but each contract controls 100 shares.
If an option is quoted at $3.50, that means:
Stock Price Movement — If a call option's stock rises, the premium increases. If it falls, the premium decreases.
Time Decay — As expiration approaches, extrinsic value disappears, so premium falls (unless the stock moves significantly).
Volatility — Higher volatility = higher premium. Lower volatility = lower premium.
Interest Rates — Small effect, but rising rates increase call premiums slightly and decrease put premiums slightly.
Dividends — Coming dividends slightly lower call premiums and raise put premiums.
Option Premium = Intrinsic Value + Extrinsic (Time) Value
Out-of-the-money options have only extrinsic value. In-the-money options are part real (intrinsic) and part speculation (extrinsic).
Premium is where traders make money. Buyers want the stock to move more than the premium they paid. Sellers want the stock to stay flat so they keep the premium they collected.
Understanding how premium moves is critical to profitable trading.
Related: Intrinsic Value, Extrinsic Value, Option Pricing Factors
