The option premium is the price of the option itself: what you pay to buy one, or what you collect when you sell one. It is quoted per share, and one contract covers 100 shares, so a quote of $3.00 means $300 actually changes hands.
That is the whole definition. The interesting part is what the price is made of. A premium has two ingredients: intrinsic value (what the option would be worth if it expired right now) and time value (what you pay for everything that could still happen before expiry). An option with no intrinsic value is not worthless, it is all hope, and hope is priced by the hour. That second ingredient melts as expiry approaches, which is a story of its own: theta decay.
The numbers
A stock trades at $100. A call with a $105 strike, expiring in 30 days, is quoted at $3.00. One contract = $300.
| Buyer of the call | Seller of the call | |
|---|---|---|
| Pays / collects | pays $300 | collects $300 |
| Best case | unlimited (stock runs) | $300, that is the ceiling |
| Worst case | loses $300, never more | open-ended if uncovered |
| Breakeven at expiry | stock above $108 | stock below $108 |
Note the breakeven. Not $105. The stock must climb past the strike plus the $3 you paid. The premium moves the goalpost.
Where it bites
"Cheap" is not a discount. A $0.30 option looks like pocket change next to a $3.00 one. It is usually priced at $0.30 because the market thinks the odds of it paying are terrible. Premium is a price set by people betting against you, not a sale tag.
Breakeven blindness. The stock finishes at $106 and your $105 call expires in the money. You still lost money: it is worth $1.00 and you paid $3.00. Being right about direction is not the same as getting paid.
For sellers, the premium is the whole prize. $300 collected is the most that trade can ever make, while the loss side is not capped in the same way. Collecting small premiums against open-ended risk is how "income" strategies quietly turn into the steamroller game.
Go feel it
Reading about a premium is one thing. Watching your $300 breathe with the stock, and melt while it stands still, is another. Buy your first call with play money in Lesson 1: What You're Actually Buying. And when someone tells you selling premium is free income, walk through The Premium Trap first.
Related concepts: strike price · theta decay · ITM, OTM, ATM