Premium Income

What Is Premium Income?

Premium income can allude to the proceeds an investor earns from writing (selling) options contracts, or the revenue an insurer earns from payments from policyholders. Regardless, premium income starts from selling risk protection to a buyer.

Investors can compose options for premium income through several strategies that reduce their overall exposure from selling risk protection, including utilizing spreads, covered calls, or investing in option income funds.

Figuring out Premium Income

Premium income is any money received by an individual or business as part or the entirety of a premium payment. The term applies commonly to options contracts or insurance policies. In the two cases, premium income repays the beneficiary for the risk that they should deliver a financial obligation to the counterparty. On account of a options contract, that obligation will either be cash or an underlying security. An insurance company's obligation will quite often be cash to supplant lost assets.

Options traders who compose and sell options contracts at times allude to the payment they receive from their counterparty as a premium. This payment entitles the buyer, who claims either a long put or call because of making that payment, to exercise the contract at their tact. Assuming the option is exercised, the writer of the contract is said to have been assigned, and must deliver the underlying asset at the strike price.

In theory, the premium of an options contract ought to be equivalent to the sum of two dollar sums. First is the difference between the strike price and the spot price of the underlying asset. The second is a monetary representation of the chance to expiration. Traders' and researchers' viewpoints on the best way to value that time until expiration will fluctuate. All would concur, nonetheless, that the time value of an options contract is subject to time decay. The value diminishes as the chance to expiration diminishes.

Model

An options premium is quoted on a per-share basis, while options contracts cover 100 shares each. A trader who cites a premium of $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 significance for premium income comes from the insurance industry. A 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 cars, families that have lost a friend or family member, or homeowners whose property has experienced critical damage.

The insurance company works out the premium income as indicated by the level of risk that it feels it is assuming relative to the claims it might need to pay out. The companies will do one of two things with the premium income from any policy. It can utilize that income to pay off losses on another policyholder's claim or it can invest the premium income in a relatively liquid asset until it requirements to pay a loss. Some portion of that premium income is a liability. Eventually, the insurance carrier should pay it to a policyholder.

Features

• Options writers (sellers) earn premium income by selling options contracts to buyers, and become committed to deliver the underlying asset at the strike price to the long whenever assigned.
• Premium income alludes to cash inflows derived from selling risk protection.
• Insurance companies sell policies and receive premium income in return for ensuring claims benefits in the event of a damage or hazard.