general

Premium

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Options Pilot Education·Educational Content

The price paid to buy an option or received when selling one. Determined by intrinsic value plus time value.

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Premium is the price of an option contract — the amount a buyer pays and a seller receives. It consists of two components: intrinsic value (how much the option is in-the-money) and extrinsic value (time value plus volatility premium). An ATM option has zero intrinsic value but substantial extrinsic value; a deep ITM option is mostly intrinsic value. Out-of-the-money options are 100% extrinsic value — all time and volatility premium that decays to zero at expiration if the stock doesn't move enough.

Understanding premium is essential for evaluating any options trade. Buyers need the stock to move enough to overcome the premium paid (the breakeven), while sellers profit by collecting premium that decays over time. The key question is whether the premium accurately reflects the likely future move. If IV is inflated (premium is rich), selling strategies have an edge. If IV is low (premium is cheap), buying strategies are more attractive.

Options Pilot's Value pillar directly assesses whether premium is rich or cheap through metrics like IV Rank, IV Percentile, and the IV/HV Ratio. When the Value score is high, it indicates that options premium is relatively cheap compared to historical levels — favorable for buyers. When Value is low, premium is expensive — favorable for sellers who collect richer credits.

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Premium is part of the Value pillar in our 5-pillar scoring system.

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