Lesson 3

Premium is the price of the promise

The number on the ticket is not a fee. It is what the promise costs, today, before anyone knows how the stock ends.

Split the premium into two pieces you can see.

Intrinsic is what the contract would pay if expiry were this second. A 90-call with ACME at $100 has $10 of intrinsic. A 110-call has none.

Time value is the rest. It is what people will pay for the chance that the stock still moves. Time value is always at risk. It does not have to become intrinsic. It can just vanish.

On this desk, one option contract covers 100 shares. A $2.40 mid is $240 of cash for one contract. That multiplier is why a cheap-looking premium can still move a book.

A buyer of a call needs the stock to rise by more than the premium, by expiry, before the trade is a win. A seller of that same call wins if the stock does less than that. Same promise. Opposite hope.