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Your Money: Why option premiums can never be negative
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By Sunil Parameswaran
Traders who are new to options, may wonder why they have to pay a premium to buy an option, considering the fact that a premium is not required to buy a futures contract. The answer lies in the fact that the former is a contingent contract, while the latter is a commitment contract. In the case of a futures contract, once the position is taken, both the long and the short face the spectre of a negative cash flow.
However, in the case of options, once the contract is entered into, the long will have either a positive or a nil cash flow, while the short will have a negative or a nil cash flow. This is the reason why options, both calls and puts, require the longs to pay a premium to the shorts at inception.
Call and put
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