Option Premium
Why a call has value, what affects premium and why premium should never be treated as free yield.
#Primary premium drivers
| Driver | Typical relationship, all else equal | Why |
|---|---|---|
| Implied volatility | Higher volatility tends to raise call premium | A wider range of possible future prices makes upside optionality more valuable. |
| Time to expiry | More time often raises total premium | More time permits more price paths, though time-value behavior is nonlinear. |
| Spot vs strike | A lower strike generally raises premium | The call is closer to or already has intrinsic value. |
| Rates / carry | Model-dependent effect | Financing and forward-price assumptions affect option value. |
| Distributions | Expected dividends can affect calls | Cash distributions change forward economics and early-exercise incentives. |
| Supply and demand | Can move price away from model estimates | Option flow and inventory constraints affect executable quotes. |
| Liquidity | Poor liquidity can widen effective cost | Bid/ask, price impact and hedging friction enter the realized trade. |
#Gross versus net premium
Net premium = gross option premium − execution costs − protocol fees − settlement costsNet premium deducts execution cost, fees and settlement cost. Gross premium should never be presented as realized yield.