Premiums And Options

Technical Explanation

The premium is the price you pay to buy an option. It's determined by various factors including the underlying asset's price, strike price, time until expiration, and volatility.

Real World Example

Consider premiums as you would tickets to a concert. If there's a surging demand (volatility) for a top-charting artist (akin to $MILK or $OPT in high demand), ticket prices (premiums) will naturally rise. Now, if the concert date is set far in the future (mirroring a longer expiration time for the option), tickets might also fetch a higher price. The reason? With more time before the concert, there's a greater window of opportunity for the artist's popularity to surge, for new albums to drop, or for any other event that could boost demand. Similarly, in the options world, a longer time frame introduces more potential for price movements and volatility, hence justifying the higher premium.