Premium
The premium is the price paid by the option buyer to the option seller.
Key Points
- Buyer pays premium upfront when opening a long position
- Seller receives premium upfront when opening a short position
- Premium is your maximum loss as a buyer
- Premium is your maximum gain as a seller
What Determines Premium?
Premium reflects the market's assessment of the option's value, driven by:
| Factor | Effect on Premium |
|---|---|
| Intrinsic value | ITM options have higher premium |
| Time to expiry | More time = higher premium (more extrinsic value) |
| Implied volatility | Higher IV = higher premium |
| Interest rates | Minor effect in crypto |
Premium vs Strike
A common confusion:
| Term | What it is |
|---|---|
| Premium | The price you pay/receive to enter the trade |
| Strike | The reference price used to calculate settlement |
Example: You buy a BTC $100,000 call for $500.
- Strike (K) = $100,000
- Premium = $500
- If BTC settles at $102,000, your payoff is $2,000 and profit is $1,500
On Hypercall
- Premium is quoted in USDC
- Displayed as price per contract (e.g., $4.05 for a 1 BTC option)
- Your account is debited/credited premium at trade execution
Related:
- Option Valuation - How intrinsic and extrinsic value combine
- Lesson 1: What is an Option?