An option premium is the price you pay to buy an option contract. It consists of two components: intrinsic value (the difference between the underlying asset price and strike price for in-the-money options) and time value (the additional amount reflecting the time remaining until expiration and expected volatility).

Five main factors influence option premiums: (1) Underlying price vs strike price, (2) Time to expiry, (3) Volatility, (4) Interest rates, (5) Dividends.

Implied volatility (IV) is the market forecast of a security future volatility, derived from current option prices. High IV means the market expects large price swings, making options more expensive.