option premium
Option premium is the price you pay to buy an option contract, the small fee that secures your right to buy or sell a stock later at a fixed price.
In plain English
"So I paid ₦8,000 for this thing and I don't even own the shares?" Tunde asked his sister Bisi, staring at his trading app in confusion. "Exactly," she said. "That ₦8,000 is the option premium. You paid for the right to buy the shares later at a price you both agreed today, not the shares themselves."
Think of option premium as the entry fee for a kind of financial reservation. You are not buying the stock. You are buying the right, but not the obligation, to buy or sell that stock at a fixed price before a certain date. The person who sells you that right pockets the premium immediately, whether or not you ever use your option.
The premium is made up of two things. There is intrinsic value, which is how much the option is already worth if you used it right now, and there is time value, which is extra money buyers pay for the chance that the stock moves in their favour before the option expires. The more time left, and the more the stock jumps around, the higher the premium tends to be.
A Nigerian investor watching Dangote Cement on a platform that offers derivatives might pay a premium to lock in a buying price, hoping the stock rises past that level before the option runs out. In London, someone trading options on the FTSE might do the same with Shell shares, paying a premium as insurance or as a bet, depending on their goal.
For someone abroad sending money home and dabbling in international brokerage accounts, the lesson is simple. The premium is the maximum you can lose on that single trade. Nothing more, nothing less. That is the calm comfort options offer compared to some other bets in the market.
An investor pays a premium of ₦450 per share for an option to buy Nestle Nigeria shares at ₦1,200 within one month. The contract covers 100 shares, so the total premium paid is ₦45,000. If Nestle never reaches ₦1,200, the investor simply loses the ₦45,000 and walks away, no further debt owed.
Questions people ask
Do I get the option premium back if I don't use the option?
No. The premium is the seller's fee for offering you the choice. If you never exercise the option, the money is simply gone, much like an insurance payment for a claim you never made.
Who receives the option premium?
The person or institution who sold or wrote the option receives the premium upfront, immediately when the contract is agreed, regardless of what happens to the stock afterwards.
Is a higher premium always a bad sign?
Not necessarily. A higher premium often just means the stock is volatile or there is more time before expiry, both of which make the option more valuable, not more dangerous by itself.
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