When buying an option, the two most important numbers to know are the premium and the strike price.

The premium is how much it costs to buy a single option, so it’s also called the option price.

It’s like the price of a single lottery ticket 🎟️

For example, if you buy an option on Amazon stock for $5, the option premium was $5 📦

Just like stock prices, option premiums go up and down every day, and people buy and sell options in the option market 📊

So even if you don’t exercise your Amazon option, its premium could go up from $5 to $10, and if you sell it for $10, you’d make a $5 profit!

The premium is also the maximum amount of money you can lose on an option, because if your option becomes worthless, you only lose the money you paid for the premium 💸

The strike price is the threshold that a stock price needs to reach for you to exercise your option to buy or sell the stock 🎯

If you own an option on Amazon stock with a strike price of $200, whenever Amazon’s stock price is above $200, you can exercise your option to buy it for $200 and sell it for a profit 📈

Later on, we’ll learn how factors like the strike price affect an option’s premium, or price, but first, let’s learn about the two main types of options!