Series · Part 4
The premium: what you really collect or pay
Tortuga Trades · · 7 min
When your broker’s screen says an option is “quoted at 2.00”, how much money is that? Think about it before reading on, because the answer — 200 dollars, not 2 — is every beginner’s first stumble. And it is not the only thing that small, innocent figure hides: there are also commissions that bite into it, a payment calendar that surprises people, and a multiplied commitment riding along as a stowaway. This part is about turning the premium into what it really is — hard cash coming into or going out of your account, with its deductions and its conditions.
Quoted per share, but paid per contract
Let’s start with the convention that explains everything. The premium is expressed per share, but an option contract is one hundred shares — that is how options markets were set up half a century ago and how they are going to stay. Arguing with it is pointless; what helps is building the reflex: every time you see a premium on screen, multiply it by a hundred before you think anything else. Make the gesture automatic, like looking both ways before crossing the street.
And careful, because the multiplier cuts both ways. A 2.00 premium that you collect is $200 coming into your account — that is the pleasant part. But the commitment you signed in exchange travels multiplied by the same hundred, and we will leave that part for the end of the article, which is where it hurts.
Gross and net: the difference is commissions
Second stop: what the screen says is not what lands in your account. You sell the Verizon call from the previous parts and the premium fills at $2.00. Your broker takes its cut — let’s say $1.30 per side, which is a realistic figure. The full math:
That 198.70 should not surprise you: it is exactly what the seller collected in part 2, and the reason the two columns of that final table did not quite add up. Two dollars and sixty cents: one commission per side. Does it matter? On one trade, no. But whoever sells premium does it many times a year, and commissions are charged every time: when you open the position, and again if you buy the option back to close it before expiration. Round trip. Recording gross premiums inflates your result a little on every trade — and that is exactly the quietest way there is to lie to yourself in trading.
From here comes a record-keeping rule that has been sacred in this house since day one: the premium is recorded net. The journal template in this same section does it that way out of the box, and not on a whim.
The money moves on day one
Third surprise, a pleasant one this time: the premium does not wait for expiration. It settles when the trade fills — today. What changes depending on the side is what remains pending afterwards:
- If you sell the option, the $198.70 comes into your account that same day and is yours whatever happens next. Nobody can claim it back. What remains pending is not the payment — it is the obligation you signed in exchange, and that lives until expiration.
- If you buy that same option, the $201.30 (the 200 of premium plus the commission) goes out that day, and that figure is also your maximum loss: whatever happens with Verizon, nobody can ask you for a cent more. The buyer sleeps soundly by definition. The seller, only if they sold committing to prices that genuinely suit them.
What makes a premium big or small
Now the million-dollar question: why does one Verizon put pay 0.40 and another, on the same stock, pay 2.60? The academic answer involves formulas with Greek letters, and it will come — in small doses — later in the series. But the formulas only put numbers on three intuitions you can understand today, without math:
| Lever | Rule of thumb | With Verizon at $47 |
|---|---|---|
| Distance from the current price | The more likely the strike is to come into play, the more expensive the option | The 46-strike put pays more than the 40-strike put |
| Time to expiration | More days = more things can happen = bigger premium | The 60-day put pays more than the 15-day one |
| Market nervousness | When the market expects big swings, all premiums get fatter | The same put pays more during Verizon’s earnings week |
For the premium seller, these three levers have a practical reading worth tattooing on yourself: you get paid for probability, for time and for fear. No more, no less. A fat premium always means you are accepting more of one of the three — a higher chance of having to deliver, more months of waiting, or more storm around you. The big, free premium does not exist, and whoever offers you one is hiding the lever from you.
The second lever has a catch: the clock is not neutral
Of the three, time is the only one that moves on its own. The stock can go up or down and the market can calm down or get nervous, but the calendar moves in only one direction and admits no argument. And that splits things unevenly.
Go back to our contract. The buyer paid $201.30 for three months of runway. If Verizon stays exactly where it was, every day that passes their right is worth a little less, because there is less time left for what they need to happen. For the seller, who already collected the $198.70 on day one, that same passing day brings them closer to the end without having had to do anything.
It is the same clock: for the buyer it drains away; for the seller it falls from the sky. That is why this series is going to spend so much time on the collecting side — it is the only one of the two that wins when nothing happens, and nothing happening is, by far, what happens most. And that is why the premium seller watches the calendar as much as the price: that trickle speeds up in the last few weeks, when there is hardly any time left to sell.
This has a technical name — time decay, and the Greek letter that measures it — but the name adds nothing to the intuition: what you buy when you buy an option is time, and time gets used up on its own. The names come later in the series.
The ×100 mistake, full version
Let’s close where we started, because the multiplier has a second half that beginners discover late — sometimes, very expensively late. The arithmetic tempts all by itself: if the 45-strike Verizon put pays 1.00, five puts pay $500 in one go. Why sell one when you could sell five?
Because the commitment travels with the same multiplier as the premium. Look at the whole math:
Five hundred dollars of premium in plain sight; twenty-two thousand five hundred of commitment in the shadows. Both numbers are equally real — it is just that one shows up on the screen and the other does not.
With this you finish the foundations: what an option is, what happens on expiration day, the four positions that exist and what money really moves. What comes next is craft — selling your first cash-secured put, the covered call, and what to do the day you get assigned.
Keep reading
- Calls and puts: the only four scenarios there areBuy or sell, call or put: four positions and nothing else. Who pays, who is obligated, and the two you will actually use.
- How to calculate your cost basis after a put is assignedYou were assigned and your shares are worth less than you paid. The real number subtracts the premium you collected, and almost nobody gets it right.