How Is the Premium of an Options Contract Determined?
The options premium, which is the price paid by the buyer to the seller, is determined by two components: intrinsic value and time value. These values are calculated using complex mathematical models, most famously the Black-Scholes model, which takes into account five key inputs: the underlying asset price, the strike price, time to expiration, volatility, and the risk-free interest rate.
Glossar
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
Options Contract
Mechanism ⎊ An options contract within cryptocurrency markets represents a financial derivative granting the holder the right, but not the obligation, to buy or sell an underlying crypto asset at a predetermined price ⎊ the strike price ⎊ on or before a specified date, the expiration date.
Time to Expiration
Decay ⎊ Time to Expiration, within cryptocurrency options and financial derivatives, represents the remaining lifespan of a contract before its termination and potential exercise or assignment.
Trading
Execution ⎊ The core of trading within cryptocurrency, options, and derivatives involves the practical implementation of strategies predicated on market analysis and risk assessment.