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Premium
Premium is the price of the option, the price paid. The premium is determined by buyers and sellers trading in the market and is the cost of the option. Option buyers must pay the agreed premium to the option sellers. It is non-returnable.

There are many factors that determine the level of the premium. A change in one of the factors will result in change in the option’s premium. The main two factors are strike (exercise) price and time to expiry. That means, different strikes and expiries have different premium levels reflecting the risks involved in holding/selling these options.

The longer-dated expiries are more expensive than the near months.
Call options with lower strike price have higher premiums, and conversely Put options with higher strike price have higher premiums.

Premium for any option is calculated by using the following formula.
Premium (PM) = Intrinsic value (IV) + Time Value (TV)

What is Intrinsic value?
It is the difference between the strike price and the underlying asset’s price (spot price). Call Options have IV when the strike is lower than the underlying asset price. Put Options have IV when the strike is greater than the underlying asset price.IV can never be negative, it is either positive or zero. An option with zero intrinsic value is not worth exercising at the expiry. An option either has or does not have intrinsic value.

In-The-Money (ITM) options – An option with intrinsic value. If the option is significantly in-the-money then it is described as ‘deep’ in-the-money option
Out-of-The-Money (OTM) options – An option with no (zero) intrinsic value. If an option is significantly out-of-the-money then it is described as ‘far’ out-of-the-money option.
At-The-Money (ATM) options – An option with an exercise price that equals, or is close to, the underlying asset price.

What is Time value?
It is simply the difference between the premium and intrinsic value of the option. That means it can be calculated by using the formula

Time Value (TV) = Premium (PM) – Intrinsic Value (IV)

A longer-dated option will have more time value than a near-dated one with the same strike. The price of the underlying can move over a greater range in one year than in one week. This means that there is more uncertainty associated with an option with one year to expiry, so the time value will be greater. On expiry, there is no uncertainty left. At that stage time-value will be ’0′.

Look at the below table for the factors that determines the options premium, and their impact on option price.

Note: A change in interest rates generally will not affect the option prices.