What is an option premium

1. What is an option premium?

An option premium is the cost or price of an option contract. For options on futures traded on exchanges, premiums are usually calculated per contract and are received by option sellers.


2. How are premiums paid for different types of options on futures?

There are two types of options on futures: futures-style and equity-style options.

For futures-style options, the buyer does not need to pay the premium upfront, and profit or loss is realized through cash settlement when the option is exercised or assigned. Futures-style options behave in a manner somewhat analogous to that of futures, and both the buyer and seller are required to maintain a certain margin in case of default. Hong Kong index options contracts are an example. For details, click here.

For equity-style options, the buyer needs to pay the premium immediately, and the seller will receive it. In this case, the buyer is exempt from margin requirements, and changes in the premium will not lead to changes in the margin requirements. However, the seller still needs to maintain a sufficient margin after receiving the premium in case the option is assigned. CME Gold option contracts are an example. For details, click here.