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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.

One option contract equals one hundred shares1 optioncontract=100 shares of the underlying
Each option contract controls 100 shares. That is why a premium “quoted at 1.20” means 120 dollars, and why five contracts commit you to five hundred shares.

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:

Quoted premium: $2.00 × 100 shares$200.00
Broker commission− $1.30
Net premium, the part that is yours$198.70

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:

LeverRule of thumbWith Verizon at $47
Distance from the current priceThe more likely the strike is to come into play, the more expensive the optionThe 46-strike put pays more than the 40-strike put
Time to expirationMore days = more things can happen = bigger premiumThe 60-day put pays more than the 15-day one
Market nervousnessWhen the market expects big swings, all premiums get fatterThe same put pays more during Verizon’s earnings week
Three levers and no formula. The technical names (delta, theta, implied volatility) come later — you already have the ideas.

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:

5 contracts × 100 shares500 shares
Obligated to buy each one at× $45
Total commitment if you get assigned$22,500

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.

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Tortuga records every premium net of commissions the moment it comes in, adds it up by position and by month, and spares you the notebook.

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Educational content. Not investment advice or a recommendation to buy or sell.