When you buy an option, the purchase price is called
the
premium.
If you sell, the premium is the amount you receive. The premium
isn't fixed and changes constantly — so the premium
you pay today is likely to be higher or lower than the premium
yesterday or tomorrow. The current price is negotiated between
traders or brokers representing traders, each trying to get the
best possible price.
If you buy options, you start out with what's
known as a net debit. That means you've spent money you
might never recover if you don't sell your option at a profit
or exercise it. And if you do make money on a transaction, you
must subtract the cost of the premium from any income you realize
to calculate your net profit.
As a seller, on the other hand, you begin with
a net credit because you collect the premium. If the option is
never exercised, you keep the money. And if you must meet your
obligation to buy or sell, or if you offset your obligation by
purchasing the option you sold, the credit can help to reduce
your net cost.
Options prices
The price of an option is affected by several factors,
including supply and demand in the market where the option is
traded, as is the case with an individual stock. Options prices
are also influenced by the direction of the overall investment
markets and the economy at large, as well as the current and past
performance of the underlying instrument.
