When it comes to renting shares and pricing the underlying stocks, there are two main concepts to consider: The first is intrinsic value pricing, and the second is premium value pricing. The price of options contracts or options premiums consist of both of these two components combined.

Premium value is also commonly referred to as extrinsic value or time value by options traders, and is part of the determining factors behind an option's price, which is determined using factors in addition to solely the price of the underlying stock. The premium value amount is the amount that is meant to be paid directly to the seller of the option as a way to offset the amount of risk that the seller is taking on by selling their option contract to you. This amount of money is essentially considered to be risk money, and is paid directly to the seller based on four determinant factors that come together to determine and justify the amount of the payment. These four factors include:

• The time left before the expiration,

• The volatility of the options contract,

• The dividends payable,

• The current interest rate.

If you are following the Black-Scholes model, calculating the premium value for the options contract in question should be relatively simple and ought to produce relatively accurate results.

The premium value aspect of pricing a stock option only comes into play if intrinsic value has not already been built into the aforementioned stock option. So for example, if you are looking at a stock that is currently trading at $50 per share, a call option that has a $60 stock price is not already going to have an intrinsic value amount built into it. A put option purchased for the same stock that has a strike price of a mere $40 on the other hand will also have no intrinsic value built into it. Option contracts that do not already have intrinsic value built into them are referred to as Out of the Money options, or OTM options.

When the stock option contract expires, the premium value disappears from it. So if you purchase a call option that happens to be an OTM or Out of the Money call option, and the stock price never rises past the original strike price, then the Premium Value contract will decay to zero when the contract expires and you will have lost all of your money in the process. Options premiums are really only useful using the Black-Scholes model for pricing. The Black-Scholes model for pricing combines the amount of time left before the expiration date with the original strike price, along with the prevailing interest rate, the current price of the underlying stock, and an estimate based on the implied volatility or IV, which is an estimate of the future volatility. All of these factors are combined to create a theoretical price.

Premium value is different from intrinsic value in that the premium value when renting shares relates to the risk that the seller is contending with when selling a stock option to you. intrinsic value on the other hand relates to the value that is already built in to the underlying financial vehicle before it is sold.

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