Net Option Premium

Net option premium can be defined as the amount that is paid by an investor or a trader for selling one option and purchasing the other option. The investor of the trader may make a combination of various options and the combination of these options may include a number of puts and call and the position of each in the call. There are two value of net option premium as it can either be positive or it can be negative. The positive value of the net option premium shows the net cash outflow where as the negative value of the net option premium shows net cash inflow.

The example of the net option premium can be assumed as the case of an investor who wants to take synthetic covered call position in a specific stock. Assume that the investor pays $2.50 per batch for a put option with a strike cost of $55, and then put up for sale a call option at the identical strike price for $1.00 per lot. The net option premium in this instance is $1.50.

If, on the other hand, the investor pays $0.50 per lot for a put option with the same strike price, and sells a call option for $1.00 per lot, then there will be a net cash inflow (a negative net option premium) of $0.50.

Other Related Accounting Articles:

• Underlying Asset
• Open Interest
• Premium Bond
• Liquidity Gap
• Managing Cash Flows in a Better way
• Net Premium Written
• Batch Level Activities Definition
• The Cost Method of Investment Accounting
• Positive and Negative Operating Leverage Definition
• Net Short