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Premiums — What Options Cost

A premium is the price you pay (or collect) for an option. It's driven by three forces: intrinsic value, time value, and volatility. Understanding these tells you whether a price is fair.

Anatomy of a Premium

Two Components, One Price

Think of a premium as two parts: the real value (what the option is worth if you used it right now) and the hope value (what it might be worth later). In trading terms, these are called intrinsic value and time value. Out-of-the-money options are pure hope value — the real value is zero.

ITM Call — Strike $0.25, Spot $0.30Intrinsic: $0.05Time Value: $0.10= $0.15OTM Call — Strike $0.35, Spot $0.29100% Time Value: $0.15 — Intrinsic = $0.00= $0.15OTM options have zero intrinsic value.You're paying entirely for the possibility that price moves in your favor before expiry.
Intrinsic Value

In, At, or Out of the Money

Intrinsic value is what the option would be worth if exercised right now. It's the gap between the current price and the strike — but it can never go negative.

CALL OPTIONITM — In the MoneyStrike $0.25↑Spot $0.30Intrinsic = $0.05$0.30 − $0.25 = $0.05ATM — At the MoneyStrike = Spot = $0.30Intrinsic = $0.00$0.30 − $0.30 = $0.00OTM — Out of the MoneySpot $0.30Strike $0.35Intrinsic = $0.00Can't go negative
Time Decay

The Clock Is Always Ticking

Time value decays to zero at expiry. The decay speeds up in the final 30 days — slowly at first, then drops off a cliff. This is why writers prefer short-dated options and buyers want more time.

Time ValueHigh$090d60d30d14d7d1d0← Days to ExpirationACCELERATION ZONE← Slow decay hereBuyers want this zoneFast decay here →Writers want this zoneTime decay (traders call it "theta") is always working against the buyer.
Volatility

Higher Uncertainty = Higher Premium

Volatile assets command larger premiums because there's a wider range of possible outcomes. The same option on a calm asset costs less than on a wild one.

Gold — Low VolatilityNarrow rangePremium: 8 SigUSDERG — High VolatilityWide rangePremium: 22 SigUSDSame strike distance from spot. Higher volatility = wider distribution = more expensive option.
Worked Example

Pricing a Call on Etcha

30-Day FIRO $0.75 Call — Spot: $0.65 — 100 Contracts
1
Intrinsic value: $0.00 — The call is OTM (out of the money). Strike ($0.75) is above spot ($0.65). You can't exercise it for profit right now.
2
Time value: 6 SigUSD — 30 days until expiry. FIRO is volatile. The market prices in the possibility of FIRO reaching $0.75+.
3
Total premium: 6 SigUSD (for 100 contracts) — This is what the writer lists the option for on Etcha's marketplace. The pricing tool on Etcha suggests this price; the writer chose to match it.
Premium = $0.00 intrinsic + 6 SigUSD time value
4
At expiry, FIRO = $0.85 →
Payout = ($0.85 − $0.75) × 100 = 10 SigUSD. Net profit = 10 − 6 = 4 SigUSD
At expiry, FIRO = $0.65 →
Loss = 6 SigUSD (premium). The time value decayed to zero.
Etcha-specificThe pricing tool is a suggestion, not a guaranteed fill. The option contract has no concept of premiums. The premium is set by the writer when they list the option for sale. The writer prices it; the market decides if it's fair. Implied volatility and pricing indicators on the Etcha UI are tools to help — the contract enforces only strike, oracle price, collateral, and expiry.
Key Takeaway

Premium = intrinsic value + time value. Writers collect it. Buyers pay it. Time is always working against the buyer and for the writer. Volatility drives premium higher — more uncertainty means more expensive insurance.

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