The option premium is the amount paid by an option buyer to gain the privilege of buying or selling an underlying financial instrument. It functions as compensation provided to an option writer in return for undertaking the obligation to buy or sell the option contract. For example, imagine you want to buy a special ticket. This ticket gives you the choice to buy or sell something later, but you have to pay for it right now. That cost is the option premium.

• If you want the choice to buy something: You can get a call option and pay the premium.
• If you want the choice to sell something: You can get a put option and pay the premium.
  

The person who sells you the ticket (the option writer) gets the premium as their reward for giving you that choice. They also take on the risk of having to buy or sell something later, depending on which option you choose. Let’s see why this is useful:

• If you are an option buyer: You can use the option to protect yourself from price changes or make a profit if the price moves in the right direction.
• If you are an option writer: The premium offsets the risk you will take and can even boost your returns if things go well.