What is the Premium to an Options Trader?
It is important to be aware of the various terms and definition of the industry if you are going to be an options trader.
In this article, we are going to discuss premiums and what they are.
The term premium is actually quite important.
The premium is the price that you are going to purchase the option at.
When you get rid of or sell the option, the price is the amount of money that you are going to receive.
This interesting key to premiums is to remember that they constantly change.
It might be one price today and then another price tomorrow.
It might be higher or lower than it was yesterday.
The price is always fluctuating.
What causes these price fluctuations? There is a constant give and take or back and forth between the buyers and the sellers of the options.
As the buyers and sellers negotiate back and forth, they will eventually agree upon a price.
The price that they agree upon is the price of the transaction that they are negotiating over.
Once the transaction is agreed upon, then the process starts all over again with the next transaction.
If you are a buyer of the options, then you begin all transactions with a something called a net debit.
The net debit means that you have spent money already and may never get that back unless you sell your option at a profit or that you get to exercise your option.
If your do make a profit, then you have to take away the premium price from your income in order to find out what your net profit is.
Now you also have the option of being a seller of an option.
If you are the seller, then you start all transactions with a net credit.
You get to the net credit because as the seller, you had the right to collect the premium.
If you as the seller never take the opportunity to exercise the option, then you will get to keep the money.
If it turns out that you do exercise the option, you still get the opportunity to keep the premium.
You do however, have the obligation to either buy or sell whatever the stock is if it is assigned.
There are a lot of terms in here that will be very important to you as you move forward with your career as an options trader.
So before you move on, make sure that you have an understanding of each of the terms that have been discussed in relation to the premiums.
In this article, we are going to discuss premiums and what they are.
The term premium is actually quite important.
The premium is the price that you are going to purchase the option at.
When you get rid of or sell the option, the price is the amount of money that you are going to receive.
This interesting key to premiums is to remember that they constantly change.
It might be one price today and then another price tomorrow.
It might be higher or lower than it was yesterday.
The price is always fluctuating.
What causes these price fluctuations? There is a constant give and take or back and forth between the buyers and the sellers of the options.
As the buyers and sellers negotiate back and forth, they will eventually agree upon a price.
The price that they agree upon is the price of the transaction that they are negotiating over.
Once the transaction is agreed upon, then the process starts all over again with the next transaction.
If you are a buyer of the options, then you begin all transactions with a something called a net debit.
The net debit means that you have spent money already and may never get that back unless you sell your option at a profit or that you get to exercise your option.
If your do make a profit, then you have to take away the premium price from your income in order to find out what your net profit is.
Now you also have the option of being a seller of an option.
If you are the seller, then you start all transactions with a net credit.
You get to the net credit because as the seller, you had the right to collect the premium.
If you as the seller never take the opportunity to exercise the option, then you will get to keep the money.
If it turns out that you do exercise the option, you still get the opportunity to keep the premium.
You do however, have the obligation to either buy or sell whatever the stock is if it is assigned.
There are a lot of terms in here that will be very important to you as you move forward with your career as an options trader.
So before you move on, make sure that you have an understanding of each of the terms that have been discussed in relation to the premiums.
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