In certain financial situations, “premium” just stands in as a fancy word for “payment.” Just like "masticate" is a fancy word for "chew," and "Congress" is a fancy word for "disorganized assemblage of blowhards."
Premium, in this sense, comes up in two key situations: insurance and options trading.
For insurance, it represents the money you pay to have an insurance policy. You have car insurance that costs $100 a month. That $100 represents the premium.
For option trading, the premium is the amount spent to purchase an option. Or, if you happen to be selling the contract, the premium is the amount you receive. If it costs $2 to buy a call for 100 shares of MSFT with a strike price of $140, then that $2 represents the premium.
Premium income equals the amount a company or individual brings in through these activities. From the insurance company's perspective, the $100 you send each month contributes to premium income. And if you are selling that MSFT call, the $2 proceeds from the sale provides your premium income from the transaction.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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