Call Premium

What is Call Premium.?

Call Premium is the fee or price that has to be paid for obtaining a call option. It is the fee that is paid to ensure that the buyer of the call option will continue to be able to buy the agreed upon commodity or financial instrument from the seller at the strike price, at anytime the buyer wishes to exercise the option, within the expiration date.
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Call Premiums are determined by the supply and demand of the call option. When the current price of the agreed commodity or financial instrument is higher than the strike price, the call option is said to be ‘in the money’.

In such a scenario, when call options are ‘in the money’, call premiums tend to rise as the buyer could buy the commodity and then sell it for profit at a price higher than the strike price. But they tend lose value when the call options are getting close to being ‘out of the money’, i.e. when the value of the commodity is lower than the strike price, at which point the option becomes useless and the buyer loses all the money paid as premiums.

Edited and Updated 30th January 2014

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