How Does the Premium of a Crypto Options Contract Work?
The premium is the price paid by the buyer to the seller (writer) for the option contract. It is non-refundable and represents the maximum loss for the buyer.
The premium is determined by factors like the underlying crypto's price, the strike price, time until expiration, and volatility. It is the core cost of acquiring the right to exercise the option.
Glossar
Core Cost
Valuation ⎊ Core cost, within cryptocurrency derivatives, represents the foundational expense required to establish and maintain a position, extending beyond simple premium payments.
Maximum Loss
Value ⎊ Maximum Loss represents the absolute worst-case financial outcome, expressed as a specific monetary value, that a derivatives position can incur over its entire life cycle.
Crypto Options
Valuation ⎊ Crypto options, representing rights ⎊ not obligations ⎊ to buy or sell a cryptocurrency at a predetermined price before an expiration date, derive valuation from underlying asset price, time to expiry, volatility, and prevailing risk-free interest rates; models like Black-Scholes, adapted for crypto’s unique characteristics, are frequently employed, though parameter estimation presents challenges due to nascent market data and potential for manipulation.
Seller
Position ⎊ A seller, within cryptocurrency and derivatives markets, occupies the initiating role in a contract, obligating them to supply an underlying asset or its equivalent at a predetermined price and future date.
High Volatility
Instability ⎊ High volatility in cryptocurrency, options, and derivatives signifies amplified and accelerated price movements, exceeding historical norms and creating substantial risk exposures for market participants.
Options Premium
Component ⎊ Options Premium is the upfront monetary consideration paid by the purchaser to the writer for the right, but not the obligation, to transact the underlying crypto asset at a specified price by a specific date.