Premium (4 graphs)
(1) In the United States, and most continental European markets, the amount of money an option buyer pays or an option writer receives for an over-the-counter put or call or the price of an exchange listed option. See Option, Call Premium. (2) In warrant markets based on the traditions of the United Kingdom, premium is the amount by which the value of an investor's position would decrease if the option or warrant were exercised immediately. See also All-In Premium, Conversion Premium (on a Convertible Bond) (diagram), Gearing (diagram), Leverage. (3) In convertible bond markets, the amount by which the value of a position would decrease if the conversion occurred immediately. See also Conversion Premium (on a Convertible Bond) (diagram), Option Premium (2). (4) The amount by which the price of an option exceeds its intrinsic value. For example, if an option to buy XYZ Corporation at $100 is selling at $9 and the stock is selling at $103, the premium is often said to be $6. To avoid confusion between (1) and (4), the term 'option price' or 'premium' is used to designate the market price of an option, and the term 'premium over intrinsic value' is used to designate the amount by which the underlying price must move beyond the strike price (for out-of-the-money options) or the current price (for at- or in-the- money options) before expiration for the option buyer to break even, neglecting commissions. See also Time Value (diagram). (5) The amount by which a coupon bearing debt instrument sells over par because its coupon provides an above market yield. (6) The quality or credit yield differential which an issuer must pay above the rate on a government bond with a comparable maturity. (7) The amount by which the price on a futures contract exceeds the price of another contract or the underlying cash instrument. See also Basis.
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