Option premium
An option premium is the price the buyer pays the seller for an option. It is made up of intrinsic value plus time value.
How it works
Intrinsic value is what the option would be worth if exercised right now. For a call it is price minus strike, for a put strike minus price, never below zero. Anything above that is time value: payment for the chance that price moves your way before expiry.
Three main things drive the premium: distance to the strike, time to expiry and expected volatility. More time and higher implied volatility make an option more expensive. Toward expiry time value melts to zero, fastest in the final days. This decay is called theta.
For the buyer the premium is the maximum loss. For the seller it is the maximum profit, earned in exchange for a large risk. Crypto option venues often quote the premium in the coin itself (for example 0.025 BTC) rather than in dollars, so check the unit.
BTC is at $62,000 and a call with a $60,000 strike costs $3,000. Intrinsic value is $2,000, time value $1,000. If BTC is still at $62,000 at expiry, the option is worth $2,000: price did not move, yet you lost $1,000 of time value.
The mistake is assuming that if price stands still, the option does too. A bought option loses some time value every day, and after a big event (news, a report) it can drop sharply as volatility falls, even if price moved your way. Buy options with time to spare and consider how much volatility is already priced in.
Questions and answers
What is an option premium in simple terms?
It is the option's price. The buyer pays it up front and owes nothing more, while the seller receives it and takes on the obligation.
Why does an option lose value if the price does not change?
Because of time decay. As expiry gets closer there is less chance of a move, so time value shrinks toward zero.
What determines the size of the premium?
The gap between the asset price and the strike, time to expiry and implied volatility. Interest rates have a smaller effect too.
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Updated: 2026-10-19