How the premium paid on options is calculated?

The premium paid on Options is not decided by any of the stock exchanges. The premium paid on Options is calculated using Option pricing models like Black-Scholes and Binomial pricing model. Market factors like demand and supply also factor in the determination of Options price.

The premium of an Option is the sum of time value and intrinsic value. For call options, intrinsic value is calculated as-

 Intrinsic Value = Spot Price - Strike Price

 For put options, intrinsic value is calculated as-

 Intrinsic Value = Strike Price - Spot Price

 It is calculated as the difference between premium and intrinsic value.

 Time Value = Premium-Intrinsic Value

The time value of the option premium is dependent on factors like the volatility of the underlying, the time to expiration, interest rate and dividend payments etc.

 So, a lot of things go into determining the premium of an Option.