The premium on an option contract is:
A) The price of the underlying commodity at the time of the transaction
B) The price at which the transaction on the underlying commodity will be carried out if and when the option is exercised
C) The price the buyer of the option pays to the seller when entering into the options contract
D) The price at which the two counterparties can close-out their position

Question

Quizplus · Accepted Answer

The premium on an option contract is the price the buyer pays to the seller when entering into the options contract. This premium is paid upfront and is non-refundable. It gives the buyer the right, but not the obligation, to exercise the option at a later date. Option premiums are affected by a variety of factors including the current price of the underlying asset, the strike price, the time to expiration, and the implied volatility of the underlying asset.

The Premium on an Option Contract Is