Premium Income

In certain financial situations, “premium” just stands in as a fancy word for “payment.” Just like "masticate" is a fancy word for "chew," and "Congress" is a fancy word for "disorganized assemblage of blowhards."

Premium, in this sense, comes up in two key situations: insurance and options trading.

For insurance, it represents the money you pay to have an insurance policy. You have car insurance that costs $100 a month. That $100 represents the premium.

For option trading, the premium is the amount spent to purchase an option. Or, if you happen to be selling the contract, the premium is the amount you receive. If it costs $2 to buy a call for 100 shares of MSFT with a strike price of $140, then that $2 represents the premium.

Premium income equals the amount a company or individual brings in through these activities. From the insurance company's perspective, the $100 you send each month contributes to premium income. And if you are selling that MSFT call, the $2 proceeds from the sale provides your premium income from the transaction.