What Is Premium Income?

Premium income can refer to the proceeds an investor earns from writing (selling) options contracts, or the revenue an i𝓡nsurer earns from payments from policyholders. In either case, premium income o♉riginates from selling risk protection to a buyer.

Investors can write options for premium income through several strategies that reduce their overall exposure from selling risk protection, including using spreads, 澳洲幸运5官方开奖结果体彩网:covered calls, or investing in 澳洲幸运5官方开奖结果体彩网:option income funds.

Understanding Premium Income

Premium income is any money received by an individual or business as part or all of a premium payment. The term applies commonly to options contracts or insurance policies. In both cases, premium income compensates the recipient for the risk that they will have to deliver a financial obligation to the counterparty. In the case of an 澳洲幸运5官方开奖结果体彩网:options contract, that obligation will eithe💜r be cash or an underlying security. An insurance company's obligation will almost always be cash to replace lost assets.

Options traders who write and sell options contracts sometimes refer to the payment they receive from their counterparty as a premium. This payment entitles the buyer, who owns either a long put or call as a result of making that payment, to exercise the contract at their discretion. If the option is exercised, the writer of the contract is said to have been assigned, and must deliver the underlying asset at the 澳洲幸运5官方开奖结果体彩网:strike price.

In theory, the premium of an options contract should be equal to the sum of two dollar amounts. First is the difference between the strike price and the spot price of the underlying asset. The second is a monetary representation of the time to expiration. Traders' and scholars' opinions on how to value that time until expiration will vary. All would agree, however, that the time value of an options contract is subject to 澳洲幸运5官方开奖结果体彩网:time decay. The value decreases as ꧒the time to expiration decre🍃ases.

Example

An options premiu🔯m is quoted on a per-share basis, while options contracts cover 100 shares each. A trader who quotes a premium o🌱f $3.25 for a call contract will expect premium income of $325 on a standard contract covering 100 shares.

Premium Income in Insurance

The second meaning for premium income comes from the insurance industry. An 澳洲幸运5官方开奖结果体彩网:insurance premium is the fee paid by a policyholder to an insurance carrier for coverage against some form of risk. Common forms of insurance cover damages to automobilꦡes, f𓃲amilies that have lost a loved one, or homeowners whose property has suffered significant damage.

The insurance company calculates the premium income according to the level of risk that it feels it is assuming relative to the claims it may have to pay out. The companies will do one of two things with the premium income from any policy. It can use that income to pay off loꦓsses on another policyholder's claim or it can invest the premium income in a relatively liquid asset until it needs to pay a loss. Some portion of that premium income is a liability. Eventually, 🍰the insurance carrier will have to pay it to a policyholder.