What are the premiums in Options trading?
In options trading, premiums, or option premiums as they are usually called, are the prices that are necessary to be paid in order to get certain options. The three factors that determine the value of this premium are:
C.Market price in share market
The two main components of an option premium are intrinsic value and time value.
Intrinsic value is only valid for well-off options and refers to the difference in the values of strike price and current trading price in stock trading.
Regarding the time value, the value goes on waning with the beginning of the expiration date and after the date has passed, the option has no value.
The time value for well-off options refers to the difference between the price of the option and the intrinsic value.
Further, the time value of out-of-the-money options is equal to the option price; as the intrinsic value is nil.
Time value is mainly augmented by the start of a higher level of volatility during the expiration period.
Also, the primary value of options by themselves is nil and as a result; when exchanges such as the National Stock Exchange quote option prices, they are mentioned and taken to be premiums.
Options can be used to devise a large number of useful strategies even for intraday trading.
They allow you to gain a considerable position in a stock without having to short-sell or buy shares.
They also protect you efficiently from huge losses and open ways for substantial profits; when utilized in the right way.
In order to successfully use options, you need to have a fine understanding of the premium so that you can effortlessly and precisely identify a good deal when it strikes you.
This will allow you to keep away from risky transactions which may cause a high amount of risk.
A detail study of the basics of options and their relevant premiums is important for a best understanding.