> For the complete documentation index, see [llms.txt](https://guide.laevitas.ch/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://guide.laevitas.ch/concepts/premium-option.md).

# Premium (Option)

{% hint style="info" %}
Option premium is the price that buyers pay for a put or call options contract to the seller.\
It is also the market (best) price of the option contract. 
{% endhint %}

### What Affects Premium ?

The main factors affecting an option's price are as follows.

#### 1. Underlying security's price

As the price of the underlying security changes, the option premium changes. An increase in the underlying price will increase call option premium, while a fall in underlying price will increase put option premium.

#### **2. Moneyness**

The moneyness directly affects the option's premium because it indicates how far away the underlying security price is from the specified strike price. 

![BTC Orderbook from Deribit](/files/N6XkPzfUkxTat8ajE9ue)

As an option becomes further in-the-money, the option's premium normally increases. Conversely, the option premium decreases as the option becomes further out-of-the-money. 

For example, as an option becomes further out-of-the-money, the option premium loses intrinsic value, and the value stems primarily from the time value.

#### 3. Remaining life of the option (Days to Expiration)

The premium of an option also largely derives from its time value, its days till expiration.

Further dated options are more expensive than near dated ones with the same strike price. This is because sellers need to be sufficiently compensated for the exposure when underwriting the option since they are locked in for a longer period.

#### 4. Volatility

The price of the option is directly related to the market's perception of the underlying's volatility.

If the market expects high volatility, option prices will be high, as there is increased level uncertainty as to where the price might settle at expiration.  

If the market expects low volatility, option prices will be low.