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Getting Started in Options
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Option
Premium, the Glue that Binds
After
the option contract, the next most important concept in options is
premium. Premium is
the "glue" that binds the option contract. Nothing is free, option holders must pay a price for the
right to buy or sell the underlying security at a specified level. That price is the premium.
The
holder pays premium to the writer of an option contract. In exchange for the premium the writer assumes the
obligation to deliver the underlying security to the option holder
as per the parameters of the contract. The writer must fulfill their part of the contract
regardless of the price of the underlying security if the buyer
chooses to exercise the option.
Premiums
are quoted on a per share basis and have standard units of trade. For most stock options traded in the United States, that
unit of trade is 100 shares. Thus, if we return to our previous example, a single
contract of the IBM November 100 call selling for $2 controls 100 shares of
IBM for a cost of just $200.
the
option contract 
american style options
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