First of all, premium is the option price agreed by the buyer and the seller at the time of transaction, and it can also be understood as the value paid by the option buyer to the option seller. The size of the premium is usually influenced by many factors, such as the price of the underlying asset, the expiration date of the option, the exercise price, the volatility of the underlying asset, the risk-free interest rate and so on. Royalty plays a role in protecting the rights of option sellers in the process of option trading.
Secondly, margin is another important concept of funds in the process of option trading, which refers to a certain amount of funds that the exchange requires the option seller to pay at the time of trading to ensure the performance ability of the transaction. The size of the margin is usually a certain proportion of the value of the option contract, and the exchange will adjust the margin ratio according to market conditions. For call options, the buyer needs to pay the deposit at the time of trading, while for put options, the seller needs to pay the deposit at the time of trading.
During the execution of the option contract, the margin can be used to pay the gains and losses arising from the option transaction to ensure the performance ability of the option transaction. If the option holder fails to exercise the option, the deposit will be returned to the option holder when the option expires; If the option holder exercises the option, the deposit will be used to pay the profit and loss of the option transaction.
In a word, the margin and premium of options play an important role in the process of option trading, representing the performance guarantee and value of option trading respectively. Understanding and mastering their meanings and functions will help investors to better participate in option trading.