The price of an option is not random. It reflects risk, volatility, time, and opportunity.
If you have looked at an options chain on Derive, you have already seen premiums.
Every call and put you buy or sell has a premium; a price you pay (or receive) to take on a specific set of risks and rewards.
Today we explain exactly what the premium means and why it is the foundation of everything in options trading.
What Is a Premium
The premium is the price of the option.
- If you are buying an option, the premium is what you pay upfront
- If you are selling an option, the premium is what you collect upfront
It is your cost for entering the position, but it is also your maximum possible loss if you are buying.
Premiums are quoted in the currency of the underlying asset. On Derive, everything settles in USDC, keeping it simple and stable.
What Factors Influence Premiums
Premiums are not random.
They are determined by several key factors:
- Price of the underlying asset
- Strike price of the option
- Time until expiry
- Volatility of the asset
- Supply and demand in the options market
Higher volatility, longer time to expiry, and deeper ITM (in-the-money) options usually carry higher premiums.
How to Think About Premiums
When you buy an option:
- The premium is your investment
- It represents the cost of having the right, without the obligation, to take a position
- It is the maximum you can lose
- It buys you leverage, protection, or exposure, depending on your strategy
When you sell an option:
- The premium is your immediate income
- But it comes with potential obligations if the market moves against you
- You are taking on risk in exchange for that premium
Understanding premiums means you understand how the market prices opportunity and risk.
Why This Matters
Everything you do as an options trader starts with evaluating premiums.
- Is the price worth the potential payout?
- Is the premium expensive or cheap relative to volatility?
- How does time decay affect the premium as expiry approaches?
Options trading is a game of probabilities, pricing, and risk control.
Premiums are the lens through which you see all three.
Your Action Today
- Open the BTC or ETH options chain on Derive
- Pick a call and a put near the current market price
- Look at the premium for each
- Think about what would need to happen for that premium to turn into a profit
- Notice how far out-of-the-money or in-the-money strikes change the premium
Tomorrow we will dig deeper into why premiums decay and how time works against buyers.
Coming tomorrow:
Day 6 – Time Decay and Theta: How Options Lose Value Over Time
Hasta manana
Cpt
CptRandlelwa
