Traded options: LIFFE: standard form: premium paid
Options are traded in contracts.
Equity options usually represent contracts to buy or sell 1,000 of the underlying shares. Contracts may have to be adjusted if there is a stock event which affects the share structure of a company upon which traded options are listed, for example a rights issue or bonus issue.
The purchaser of an option has to pay a premium for buying the contract.
For an equity option the amount of the premium is expressed as a value per share.
Mr Smith wants to buy options to buy 10,000 XYZ PLC shares at an exercise price of 260p expiring in January. The current premium is 24p per share. He places an order to buy 10 January 260p call contracts. Each contract cost 1,000 x 24p = £240. Therefore ten contracts cost £2,400.
For an index option premiums are quoted in index points. The cost of the contract is the premium in index points multiplied by £10.
If the cost of June 5300 FTSE 100 call options stands at 200 index points, the cost of one contract is 200 x £10 = £2000.