Options Premium


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Options premiums consist of time premium plus intrinsic value. If the option is not in the money, all the premium is considered time premium. Time premium reflects the price for the remaining life of the option and the volatility component. As time passes and option expiration grows near, the value of the time premium decreases, and the amount of decrease grows faster as option expiration nears. Theta rises sharply during the last few weeks of trading and can cause negative impacts on a long holder's position. This negative impact can be magnified if the option's implied volatility is also falling with rising theta.

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