Define ‘Options Premium’ and Its Two Primary Components

The options premium is the total price a buyer pays to the seller (writer) for the rights granted by the option contract. It is composed of two primary parts: Intrinsic Value and Extrinsic Value (or Time Value).

Intrinsic Value is the profit if the option were exercised immediately. Extrinsic Value is the remaining portion, which accounts for the time until expiration and the market's expectation of volatility.