uTrade Algos

What is net options premium and how is it calculated?

The net options premium represents the total value of premiums received or paid for a combination of options positions in a strategy or portfolio. To calculate the net options premium:

  • Determine the premiums of individual options contracts.
  • Multiply each premium by the number of contracts.
  • Add up the individual premiums to calculate the total.

For instance, if you sold two call options at ₹3 each, sold one put option at ₹2, and bought three put options at ₹1 each, the calculation would be:

(2* ₹3) + (-₹2) + (3*- Re.1) = ₹6 – ₹2 – ₹3 = ₹1

Therefore, the net options premium in this scenario is ₹1, signifying the total premium received or paid for the combination of options positions.

What is the importance of net options premium?

Net options premium holds importance in options trading as it signifies either a net cash outflow (if positive) or a net cash inflow (if negative). It’s particularly valuable for traders engaging in multi-legged strategies involving various options contracts, each carrying its premium or market price. Understanding the net option premium is crucial for comprehending the total capital inflow or outlay in these transactions.

Moreover, it aids traders in adjusting their strategies to achieve a specific total premium amount, including zero-cost positions. Calculating the net options premium is essential for determining key metrics like maximum loss and breakeven price in trades involving multiple options. This figure serves as a guiding metric, allowing traders to assess the overall financial implications and risk exposure of complex options strategies, aiding in decision-making and strategy adjustments.