When is an option premium expensive?
What is an option premium?
The option premium is the price of one contract, made up of intrinsic value plus time value. The buyer pays it, the seller collects it. For the seller it is not automatically profit: it is payment for an obligation that stays in place until the position is closed or expires.
Set the premium against the share price
An option price in euros means little by itself. A 3 € premium is a large bet on a 50 € stock and a small one on a 200 € stock. Dividing the premium by the share price turns it into a percentage, and only that percentage compares options across stocks that trade at very different price levels. For two at-the-money options with the same days to expiration, the one with the higher percentage is the one the market expects to move more.
The volatility inside the price
Near the money a rule of thumb links the two: the premium is roughly 0.4 × share price × implied volatility × the square root of (days to expiration ÷ 365). Read backwards, a premium tells you the IV the market is charging. The 0.4 is a rounded 0.399, and the shortcut holds only for options at or near the money, with rates and dividends ignored. Further from the money, read the IV from the option chain instead.
Expensive against its own history
An IV figure becomes a verdict only against its past. The IV percentile calculator places today’s IV within its 52-week range: the same 25 % can sit near the bottom of one stock’s year and near the top of another’s. A premium is expensive when the volatility it implies is high for that stock, not when the euro amount is large. Even then it can be a fair price for an event that is actually coming.
The common misreading
Premiums are often compared in euros across stocks: the 5.72 € option looks twice as expensive as the 2.86 € one. If the first is on a 200 € stock and the second on a 100 € stock with the same IV and expiration, both cost the same 2.86 % of the share price and are priced identically. The reverse trap is a premium that looks small in euros on a cheap stock but carries twice the IV. Compare the percentage and the implied volatility, never the euro amount alone.
Worked example
Hypothetical numbers for illustration, not a market quote and not a recommendation.
Three example stocks, each with an at-the-money call 30 days from expiration, rates and dividends ignored. Stock A trades at 100 € with an implied volatility of 25 %; its call costs about 2.86 €, or 2.86 % of the price. Stock B trades at 50 € with an IV of 50 %; its call also costs about 2.86 €, but that is about 5.7 % of the price.
Stock C trades at 200 € at 25 % and its call costs 5.72 €: twice the euros of A, the same 2.86 %. For A the rule of thumb gives 0.4 × 100 × 0.25 × √(30/365) ≈ 2.87 €. Fees are ignored.
Strategies where the term matters
- Cash-Secured Put — After a 30% drop, would the strike still be a price you actually want to pay?
- Covered Call — Are you willing to hand over the shares at the call strike - even if they keep running afterwards?
- Long Call — Will the move go far enough past your break-even - and get there in time?
Calculators for this term
Track it in your journal
Related terms
Every term in one place: the options glossary.
This material is general information about option strategies, written for a general audience. It is not investment advice, not a recommendation, and not financial analysis. Options can lose their entire value, and uncovered positions can lose more than the amount committed. Anything said about tax is general in nature and is no substitute for professional tax advice. Last reviewed: 2026-08-06.