In this paper we will explain Contingent Premium Option. It is basically a European option. The contingent premium option holder does not pay an “upfront premium” but agrees to pay the same if the option has an expiration value. A contingent premium option is basically a European option.
The premium will be paid if the contingent premium option finishes “in the money”. Otherwise, if the option expires “at the money” then, no premium will be paid. “In the money” is a financial term used to refer an option whose value depends on the present market price, that is, whether the market price exceeds the call price of the option or not.
On the other hand, “at the money” means the market price of the option and the strike price are equal.If a contingent premium option expires “in the money” then there is a possibility of loss, that is, the expiration value, market value at the time of expiration of the option is very important.
A contingent premium option holder will also incur a loss if the option gets expired “in the money”. The option holder bets that the option may get expired “in the money” or far “in the money”.
However, the buyer of the contingent premium option usually pays no “upfront premium” but, promises to pay a Premium, which is predetermined, if the option has any expiration value.