What is the price of an option called?

The price of an option, called the premium, is composed of a number of variables. Options traders need to be aware of these variables so they can make an informed decision about when to trade an option. When investors buy options, the biggest driver of outcomes is the price movement of the underlying security or stock.

How do options contracts work?

An options contract has terms that specify the strike price, the underlying security, and expiration date. Typically, a contract will cover 100 shares (though it can be adjusted for special dividends, mergers, or stock splits). When agreeing on an options contract, buyers need to look at the “ask” price (the amount a seller is willing to receive).

What are the terms of an option contract?

The terms of an option contract specify the underlying security, the price at which that security can be transacted (strike price), and the expiration date of the contract. In the case of stocks, a standard contract covers 100 shares, but the share amount may be adjusted for stock splits, special dividends, or mergers.