Strike Price and Premium, Explained

Strike price sets the deal. Premium sets what it costs to be part of it.

Two different numbers, two different jobs

The strike price is the fixed price written into the contract — what you can buy at (call) or sell at (put). The premium is what you pay to own that right, quoted per share and charged in full for 100 shares per contract. Strike answers "what's the deal." Premium answers "what does the deal cost."

Every premium is built from two pieces:

• Intrinsic value — what the option is worth if you exercised it right now.
• Time value — everything above that, reflecting the chance the stock still moves in your favor before expiration.

An option that's already "in the money" costs more. An option that's pure speculation on a future move costs less, and that entire cost is time value.

Worked example

XYZ trades at $75. Here are three call strikes, all expiring in 45 days:

The $70 call already lets you buy below today's $75 price, so it costs the most: $5.00 of its $6.80 premium is intrinsic value ($75 − $70), and the remaining $1.80 is time value. The $80 call needs the stock to climb $5 just to reach its strike, so it has zero intrinsic value — its entire $1.20 premium is a bet on time.

Why it matters to both sides

For a buyer, the premium is the most you can lose — and a strike close to today's price costs more precisely because it's more likely to pay off. For a seller, the premium is income collected upfront: a closer strike pays more but risks assignment sooner; a farther strike pays less but is less likely to be reached.

Key takeaway: Strike sets the terms of the trade; premium is the price of entering it, and it's made of intrinsic value (what's already earned) plus time value (what's still a bet).

Time value doesn't sit still, though — it erodes as the clock runs, which is exactly what the next lesson on expiration covers.

This lesson is educational content explaining standard options mechanics, not personalized investment or trading advice.