Option Premium
An option premium is the price of an option: the amount the buyer pays up front and the seller keeps, whatever happens next. It is the most an option buyer can lose and the most an option seller can earn.
What the premium is made of
An option gives its buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price, the strike price, until or at a set date. The premium has two parts. Intrinsic value is what the option would be worth if exercised right now, for example a call with a 2,000 strike when ether trades at 2,100 has 100 of intrinsic value. Time value is everything above that: what buyers pay for the chance that the price moves further in their favour before expiry.
Time value depends mainly on how long the option has left and on implied volatility, the market's expectation of how much the price will swing. More time and higher implied volatility mean a higher premium. As expiry approaches, time value shrinks, a process called theta decay, and on the last day only intrinsic value is left.
A worked example
Say ether trades at 2,000 and you buy a 30-day call with a strike of 2,200 for a premium of 80 USDC per ETH. You pay 80 USDC now. For the trade to break even at expiry, ether has to settle at 2,280, the strike plus the premium. At 2,400 the option pays 200, a profit of 120. At 2,150 it expires worthless and the 80 USDC is gone.
The seller receives the 80 USDC immediately. If ether finishes below 2,200 they keep it all, but at 2,500 they owe 300 and lose 220 overall. Some crypto options venues quote premiums in the underlying coin, for example 0.04 BTC, so the dollar value of the premium also moves with the coin's price.
How people lose money on premiums
Buyers often pick cheap, far out-of-the-money options and lose the premium repeatedly, because the price has to move a long way, and soon. Buying right after a crash or before a big event is also costly: implied volatility is high then, so premiums are inflated and can drop sharply even if the price barely moves.
Sellers face the opposite problem. Collecting small premiums month after month can feel like steady income until one large move produces a loss many times the premiums collected. Selling uncovered calls on a volatile coin carries, in principle, unlimited risk.
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Frequently asked questions
Who receives the option premium?
The seller, also called the writer, of the option. They keep it whether or not the option is exercised, in exchange for taking on the obligation.
Can I get the premium back?
Not as a refund. You can sell the option before expiry at its current premium, which may be higher or lower than what you paid.
Why are crypto option premiums so high?
Crypto prices usually swing more than stocks or currencies, so implied volatility is higher. Higher expected volatility raises the time value part of the premium.
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