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I understand what is the premium on an option.

In case I acquire an option, the premium is considered as the price I pay to have the "right" to exercise the option.

In case I sell an option, the premium is the money I get from the other counterparty and he or she will have the right to exercise the option.

For these two cases, If I sell / buy the option I get, is this money considered as a premium too.

Let's say I acquire an option, paying the premium. 1 week later I sell this option to another person. Is the money received from this last person also considered as a premium?

Thank you,

Kat

  • Curious, are you planning to trade options? – JoeTaxpayer Apr 5 at 16:53
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In the early days, option premium was considered the income received by the seller of an option. Over time it has come to mean the option's price and therefore, either way it's considered premium.

  • I'm not sure I see the distinction - the seller receives the "price" of the option regardless of if the sale is to open or close a position, correct? – D Stanley Apr 5 at 18:25
  • 40 years ago the usage was slanted toward the seller receiving a premium for his action and the buyer paying a price. Today there is no distinction. Premium is synonymous with price. – Bob Baerker Apr 5 at 18:45
  • Okay that makes more sense. Thanks. – D Stanley Apr 5 at 18:59
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Let's say I acquire an option, paying the premium. 1 week later I sell this option to another person. Is the money received from this last person also considered as a premium?

No, that would just be sale proceeds.

Think of it like an insurance contract. When you sell insurance you receive the premium, and are on the hook for the risk. When you sell a contract that you own, you're just selling an asset you own.

  • 1
    1. is that true. 2 does it matter? if OP buys a call, he pays a premium. We all agree that that is true. But who is to say he actually bought that call from an underwriter? he could have just as easily bought it from a holder of a contract. Just like when he sells he sells to another nameless individual. But to that new buyer, he is also paying a premium.... Does it really make sense to have 2 different words for the same thing? especially when it really doesn't change anything, not functionally... not physiologically.. not financially. – sofa general Apr 5 at 19:15
  • That's all well and good and in line with @BobBaerker's answer, it's all premium. But when I'm considering my own portfolio and trading, when I sell something like a covered call, I'm collecting premium in exchange for risk. When I buy a long put, I'm buying a contract, when I sell that put, I'm just selling an asset not collecting premium for risk. Who or what the counterparty is doing or trading isn't my concern. Collecting premium involves assumption of risk, there is a massive difference between selling a covered call and unloading a long put. – quid Apr 5 at 19:23
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    @sofa general -I don't know which word would be accepted if you were in Jeopardy :-). An option buyer pays a premium for the right to either buy/sell at the strike. The seller receives a premium for agreeing to the contract's obligation. Both have taken on risk, just in opposite directions. If you're STC a long option then you're (hopefully) getting back the premium you paid for the contractual right. AFAIC, this is one of those situations where the words are used interchangeably. You could just as easily call it cost and proceeds. When it comes to P&L, it's all insignificant detail. – Bob Baerker Apr 5 at 20:11

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