August 15, 2025 • 13 mins
"How are options premiums priced or determined (what factors affect the price)?"
Have you ever looked at an options chain and wondered why one contract costs pennies and another costs a fortune? In this episode, we break down the fundamental factors that determine an options premium. We explain how the price tag isn't just a number—it tells a story about market expectations, time, and volatility. We simplify core concepts like intrinsic value, time value, and the Greeks to give you a clear understanding of what you're really paying for.
After listening, how will you evaluate options premiums differently? Be sure to subscribe for more simple, step-by-step guidance on conservative options trading.
Key Takeaways
- An options premium is primarily determined by two components: intrinsic value (the tangible, "in the money" profit) and time value (the value assigned to the potential for future price movement).
- Time is a crucial factor, as an option's time value decays every day, a phenomenon measured by theta. This decay accelerates as expiration approaches.
- Implied volatility is the "wild card." It represents the market's expectation of how much the stock will jump around. Higher volatility leads to higher premiums.
- The Greeks (Delta, Gamma, Theta, and Vega) are simple measures that explain how an option's price reacts to changes in the stock price, time, and volatility.
- Understanding these factors allows you to spot potential mispricings and determine if you agree with the market's expectation, which is the core of smart options trading.
"The premium isn't just a price, it's telling a story. It's a whole narrative packed in there: market fear, greed, hope, the clock ticking."
Timestamped Summary
- 1:08 Intrinsic value: The rock-bottom minimum price
- 2:10 Time value: Paying for possibility and potential
- 3:09 Volatility: The "wild card" that inflates premiums
- 4:31 The Greeks: Simplifying sensitivity measures
- 8:08 Case Study: The Tesla earnings example
- 9:47 Putting it all together: Practical tips for traders
Subscribe for more content that breaks down complex topics into simple guidance! Leave us a review on Apple Podcasts and help us empower more investors.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Today we're going to try and shortcut things a bit.
We're looking at optionpremiums, right, you know why
does one cost pennies andanother costs well, a small
fortune?
Speaker 3 (00:29):
What actually goes into that price.
It's pretty much thefundamental question if you're
trading options.
If you don't get what makesthat premium tick, you're flying
blind sort of.
We've been looking at thispiece Unlocking Options Premiums
and it lays out the mainingredients pretty clearly, like
figuring out a recipe.
Speaker 2 (00:42):
Yeah, exactly.
So our goal here is just topull out those key ingredients,
you know, give you the quickversion, the distilled insights
from the source.
No dense textbooks needed.
Right, it's not rocket science,but understanding this price.
It's really crucial.
Tells you a story, doesn't it?
About market expectation.
Speaker 3 (00:59):
Definitely so.
Basics first, the optionpremium.
Just the price, what you pay tobuy or what you get paid to
sell.
Simple as that.
Speaker 2 (01:08):
Got it, the price tag OK, and the source says a big
chunk of that can be somethingcalled intrinsic value.
Speaker 3 (01:14):
Yeah, intrinsic value .
Think of it as a profit that'salready sort of built in because
the stock's price is alreadyfavorable compared to the option
strike price is alreadyfavorable compared to the option
strike price.
The source is really clear.
This is the rock bottom minimumvalue.
If an option is in the money,it can't be worth less than this
, practically speaking.
Speaker 2 (01:33):
OK, and they had a good example Stock at $100,
you've got a call option with a$90 strike.
Yep, that means $10 ofintrinsic value.
You know you could use theoption buy at $90, sell at $100,
boom, 10 bucks.
Speaker 3 (01:46):
Exactly, and it works for puts too.
Stocks at $80, but you have a$90 strike put, also $10
intrinsic value.
You can sell at $90 using theput buy it back for $80 in the
market $10 right there, tangiblevalue.
Speaker 2 (02:02):
So that's the floor price.
The money's worth right now.
But here's the thing Mostoptions cost more than that, and
even options with zerointrinsic value still cost
something.
Speaker 3 (02:10):
Right, and that extra bit, that's what the source
calls time value.
Speaker 2 (02:13):
OK, time value.
Speaker 3 (02:14):
This is where the market price is in Well
possibility potential.
It's the value assigned to thechance that the stock price
might move even more in yourfavor before the option expires.
Speaker 2 (02:24):
Right.
Speaker 3 (02:25):
Because there's still time on the clock for things to
happen.
You pay extra for thatpotential.
Speaker 2 (02:29):
That makes perfect sense.
I mean an option with, say, 60days left has way more time for
the stock to move around thanone with just a week left.
Speaker 3 (02:39):
Absolutely, even if the strike price and everything
else is the same.
Speaker 2 (02:42):
So that 60-day option will have a lot more time value
packed into its premium.
Speaker 3 (02:47):
Exactly More time, more potential, more time value,
and the source uses that greatanalogy for what happens to it.
Speaker 2 (02:54):
Oh yeah, the ice cream one.
Speaker 3 (02:55):
Melts faster than ice cream in Texas.
As expiration gets closer, thattime value just disappears.
It decays.
That's tied into theta, whichwe'll get to.
Speaker 2 (03:04):
Okay, so time is a big factor.
Then the source talks aboutvolatility, calls it the
wildcard.
Speaker 3 (03:10):
Yeah, this is where things get spicy.
It's about how much the stockis expected to jump around.
Speaker 2 (03:15):
Like that drunk squirrel on espresso line they
used.
Speaker 3 (03:20):
Huh, yeah, exactly, if a stock is expected to be
really erratic, really volatile,the options get more expensive,
much more expensive.
Speaker 2 (03:29):
Because there's a higher chance of a big winning
move for the buyer.
Speaker 3 (03:32):
Precisely so.
The seller demands a higherpremium to compensate for that
risk of a big payout.
Speaker 2 (03:38):
And it's key that it's about the expectation of
movement right, the impliedvolatility, even if the stock is
sitting still now, if everyonethinks it's about to go wild.
Speaker 3 (03:47):
That's implied volatility or 5E.
It's the market's forecastbaked into the option price and
you see it spike around certainevents like earnings reports or
Fed announcements.
Classic examples Uncertaintygoes up, traders brace for big
moves, boom IV shoots up andthose option premiums get
inflated.
Speaker 2 (04:07):
Which leads to that point.
The source made about smarttraders.
Speaker 3 (04:10):
Right, they often look to sell that premium before
those events.
They leads to that point.
The source made about smarttraders Right, they often look
to sell that premium beforethose events.
Speaker 2 (04:13):
They're collecting that high price.
Speaker 3 (04:15):
Exactly.
They're betting the fear.
The expectation is overgun.
They collect the inflatedpremium hoping it collapses
after the news is out andreality sets in.
Speaker 2 (04:24):
Okay, so intrinsic value, time value, volatility.
Now the source mentions theGreeks, kind of working behind
the scenes.
Speaker 3 (04:31):
Yeah, the Greeks Sounds intimidating maybe, but
they're just measures ofsensitivity, how the premium
reacts to different things.
The source keeps it simple.
Speaker 2 (04:39):
Okay, simplifying, then Delta.
That's roughly how much theoption price changes for every
$1.
The stock moves.
Speaker 3 (04:46):
Yep, basically Directional sensitivity.
Speaker 2 (04:48):
Gamma that's how much the delta itself changes, like
acceleration.
Speaker 3 (04:52):
Good way to put it how delta speeds up or slows
down.
Speaker 2 (04:54):
Then theta.
That sounds important.
It's how much value the optionloses just because time passes
like per day.
Speaker 3 (05:01):
Exactly that.
Daily time decay the sourcenails it.
Enemy for the buyer, friend forthe seller.
It's always ticking.
Speaker 2 (05:08):
Right, and the last one mentioned is vega.
Speaker 3 (05:10):
Vega.
That measures sensitivity tochanges in implied volatility If
IV goes up 1%.
Vega tells you roughly how muchthe option price should
increase or decrease if IV falls.
Speaker 2 (05:21):
Okay, and the really key takeaway, the source pulled
out about these Greeks.
It's about who they tend tofavor right, especially time and
volatility.
Speaker 3 (05:28):
Yeah, generally speaking, for option buyers,
time and volatility often workagainst them.
Theta is constantly eating awayat their premium.
Speaker 2 (05:36):
Every single day.
Speaker 3 (05:37):
Every day, and beta can hurt too If they buy when IV
is high and then IV drops,which often happens after news.
Speaker 2 (05:44):
Like after earnings.
Speaker 3 (05:45):
Right.
The premium can shrink becauseof vega, Even if the stock moves
slightly.
The right way it's that IVcrush.
Speaker 2 (05:51):
But for sellers it's flipped, Totally flipped.
Speaker 3 (05:53):
They collect the cash up front.
Beta decay that's money intheir pocket, metaphorically
speaking.
Speaker 2 (05:59):
Each day the option loses time, value and if IV
drops after they sold, high,vega helps them too, making the
option cheaper to potentiallybuy back.
So time, decay and falling IVcan be the seller's best friends
.
Speaker 3 (06:11):
Often yes.
Speaker 4 (06:14):
Ever wasted time hunting for the perfect options
trade, only to find out thestock has no volume or the
spreads are trash.
That's why we created theUltimate Watch List a list of
the top 144 stocks for optionstraders in 2025.
We ran thousands of stocksthrough over a dozen filters.
Only the best made the cut.
These are the names with realmovement, strong premiums, tight
(06:37):
spreads and the kind of openinterest you want to see.
Grab it for free atweloveoptionscom.
Slash stocks list and skip theguesswork on your next trade.
Speaker 2 (06:48):
The source also touches on a couple of other,
maybe smaller factors interestrates and dividends.
Speaker 3 (06:53):
Yeah, they're technically in the pricing
models, the math behind it all.
Interest rates matter a bitmore for really long-term
options.
Aeps, you know, not usually ahuge deal for short-term trades.
Speaker 2 (07:05):
And dividends.
Speaker 3 (07:06):
Dividends can nudge prices, yeah, especially around
the ex-dividend date because thestock price is expected to drop
by the dividend amount.
It slightly changes the gamefor calls and puts around that
time.
Speaker 2 (07:16):
But mostly noise for short-term stuff compared to the
big three.
Speaker 3 (07:20):
Generally, yes.
Intrinsic time and volatilityare the main drivers you feel
day to day.
Speaker 2 (07:25):
Okay, and then there's one more influence the
source brings up Just plain oldsupply and demand.
Speaker 3 (07:31):
Market psychology.
Sometimes the price isn't justabout the neat math.
Speaker 2 (07:35):
Right, like if a stock is suddenly meme-worthy
and everyone rushes to buy calls.
Speaker 3 (07:39):
Exactly that.
Sheer buying pressure can pushpremiums up beyond what the
models might say Just demandoutstripping supply.
Speaker 2 (07:48):
Or the opposite, If everyone's suddenly terrified
and selling puts like crazy thatcan depress their prices.
Speaker 3 (07:53):
Yeah, and the point the source makes isn't that you
need to predict these moodswings perfectly.
It's more about recognizingwhen supply and demand might be
making an option look you know,unusually expensive or cheap
relative to the underlyingfactors, spotting potential
mispricings.
Speaker 2 (08:08):
That Tesla earnings case study they used was perfect
for illustrating this.
Speaker 3 (08:12):
Oh yeah, the TSLA example Classic Stocks around
$250 before earnings Hugeanticipation.
Speaker 2 (08:19):
Everyone was betting on a massive move.
People loading up on calls andputs.
Speaker 3 (08:22):
Which did what Sent implied volatility absolutely
soaring.
The source said over 100%.
Speaker 2 (08:28):
Crazy high.
And they specifically mentionedthe weekly $250 straddle,
buying the call and the put atthe $250 strike.
Speaker 3 (08:36):
And that straddle cost over $30.
Think about that.
To break even, let alone profit, tesla stock needed to move
more than $30 away from $250 upor down by Friday's close.
That was the market's bet,priced into that premium.
Speaker 2 (08:51):
A $30 plus move expected in just a few days.
So what actually happened?
Earnings dropped.
Speaker 3 (08:56):
Stock moved about $8.
Speaker 2 (08:58):
$8, not $30.
Ouch.
Speaker 3 (09:00):
Ouch is right For the buyers who paid that $30
premium.
Their straddles got absolutelycrushed, demolished.
Speaker 2 (09:06):
Because the actual move was tiny compared to the
expected move priced in.
Speaker 3 (09:09):
Exactly, and time passed.
Ivy collapsed after theearnings uncertainty was gone.
The value just vanished.
Buyers lost big time.
Speaker 2 (09:16):
So who won?
Speaker 3 (09:17):
The sellers, the folks who looked at that $30
shadow price and thought, whoa,the market's expectation seems
way out of whack here.
A $30 move is nuts.
They sold it, collected thatfat $30 premium up front and
watched it decay into almostnothing when the huge move
didn't happen.
Speaker 2 (09:36):
Textbook pricing disconnect, like the source
called it.
Speaker 3 (09:39):
Perfectly put.
The premium reflected anexpectation that reality just
didn't deliver.
Understanding premium helps youspot those disconnects.
Speaker 2 (09:47):
Okay, so let's tie this together.
What are the practical thingsthe source says you, the
listener, can actually do withthis knowledge?
Speaker 3 (09:54):
Well, first obvious one look for spots where IV
seems really high, maybehistorically high for that stock
, and consider selling premium.
Then you collect more cash forthe risk.
Speaker 2 (10:03):
Makes sense.
It also suggests maybe beingwary of buying options that are
mostly time value, especiallyway out of the money ones.
Speaker 3 (10:11):
Yeah, unless you have a very specific, strong reason
or strategy, that time value isalways melting.
Speaker 2 (10:16):
And watch the Greeks right, Know your theta and vega.
Speaker 1 (10:27):
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Speaker 3 (11:11):
Understand how that daily decay, theta and potential
IV changes, vega, are going toaffect your position.
Whether you're long or short,the option.
Speaker 2 (11:19):
And the source seemed pretty down on just nakedly
buying calls or puts rightbefore something like earnings.
Speaker 3 (11:25):
Generally, yeah, because you're often paying peak
IV, which is likely to getcrushed right after the news
hits, unless, again, it's partof a spread or strategy designed
for that.
Speaker 2 (11:36):
But if you are a seller, use data.
Let it work for you.
Speaker 3 (11:41):
Let time be your friend.
Collect premium.
Let it decay day by day.
Speaker 2 (11:45):
So, bottom line, it's not about being a math whiz,
necessarily.
It's about understanding theforces.
Speaker 3 (11:49):
Exactly Intrinsic value, what's real now?
Time value, the potential,volatility, the market's fear or
excitement, the Greeks howsensitive it is and, yeah,
sometimes just raw supply anddemand.
Speaker 2 (12:01):
Understanding how the price is built helps you think
differently.
Not sometimes just raw supplyand demand.
Understanding how the price isbuilt helps you think
differently.
Not just hoping for a direction, but seeing the dynamics.
Speaker 3 (12:07):
Maybe it lets you think more like the house, as
the source hints, getting paidto take on the risk that buyers
are betting on.
Speaker 2 (12:13):
So, wrapping up, the big message from the source
seems to be that premium numberisn't just a price, it's telling
a story.
Speaker 3 (12:21):
Yeah, it's a whole narrative packed in there Market
fear, greed, hope, the clockticking.
It's all quantified in thatsingle number is the market
consensus on what might happen.
Speaker 2 (12:31):
So next time you look at an options chain, don't just
glance at the strikes and dates.
Really look at the premium.
Speaker 3 (12:36):
Ask yourself why it costs what it costs.
What is it telling you aboutexpectations?
Speaker 2 (12:40):
Which leads right into that final thought.
The source leaves us with Kindof a challenge for you, the
listener.
Speaker 3 (12:45):
Right Now that you understand what goes into that
premium, what story it's tellingabout market expectations, your
job is to decide.
Speaker 2 (12:53):
Do you agree with the market's story?
Speaker 3 (13:00):
Does that expectation , reflected in that price, seem
reasonable to you?
And then you trade based onyour own analysis of whether the
market's got it right or wrong.
That's the game.
Speaker 4 (13:07):
This is an AI podcast based on educational material
from Option Genius.
Speaker 2 (13:12):
Visit us today at optiongeniuscom.
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Today we're going to try and shortcut things a bit.
We're looking at optionpremiums, right, you know why
does one cost pennies andanother costs well, a small
fortune?
Speaker 3 (00:29):
What actually goes into that price.
It's pretty much thefundamental question if you're
trading options.
If you don't get what makesthat premium tick, you're flying
blind sort of.
We've been looking at thispiece Unlocking Options Premiums
and it lays out the mainingredients pretty clearly, like
figuring out a recipe.
Speaker 2 (00:42):
Yeah, exactly.
So our goal here is just topull out those key ingredients,
you know, give you the quickversion, the distilled insights
from the source.
No dense textbooks needed.
Right, it's not rocket science,but understanding this price.
It's really crucial.
Tells you a story, doesn't it?
About market expectation.
Speaker 3 (00:59):
Definitely so.
Basics first, the optionpremium.
Just the price, what you pay tobuy or what you get paid to
sell.
Simple as that.
Speaker 2 (01:08):
Got it, the price tag OK, and the source says a big
chunk of that can be somethingcalled intrinsic value.
Speaker 3 (01:14):
Yeah, intrinsic value .
Think of it as a profit that'salready sort of built in because
the stock's price is alreadyfavorable compared to the option
strike price is alreadyfavorable compared to the option
strike price.
The source is really clear.
This is the rock bottom minimumvalue.
If an option is in the money,it can't be worth less than this
, practically speaking.
Speaker 2 (01:33):
OK, and they had a good example Stock at $100,
you've got a call option with a$90 strike.
Yep, that means $10 ofintrinsic value.
You know you could use theoption buy at $90, sell at $100,
boom, 10 bucks.
Speaker 3 (01:46):
Exactly, and it works for puts too.
Stocks at $80, but you have a$90 strike put, also $10
intrinsic value.
You can sell at $90 using theput buy it back for $80 in the
market $10 right there, tangiblevalue.
Speaker 2 (02:02):
So that's the floor price.
The money's worth right now.
But here's the thing Mostoptions cost more than that, and
even options with zerointrinsic value still cost
something.
Speaker 3 (02:10):
Right, and that extra bit, that's what the source
calls time value.
Speaker 2 (02:13):
OK, time value.
Speaker 3 (02:14):
This is where the market price is in Well
possibility potential.
It's the value assigned to thechance that the stock price
might move even more in yourfavor before the option expires.
Speaker 2 (02:24):
Right.
Speaker 3 (02:25):
Because there's still time on the clock for things to
happen.
You pay extra for thatpotential.
Speaker 2 (02:29):
That makes perfect sense.
I mean an option with, say, 60days left has way more time for
the stock to move around thanone with just a week left.
Speaker 3 (02:39):
Absolutely, even if the strike price and everything
else is the same.
Speaker 2 (02:42):
So that 60-day option will have a lot more time value
packed into its premium.
Speaker 3 (02:47):
Exactly More time, more potential, more time value,
and the source uses that greatanalogy for what happens to it.
Speaker 2 (02:54):
Oh yeah, the ice cream one.
Speaker 3 (02:55):
Melts faster than ice cream in Texas.
As expiration gets closer, thattime value just disappears.
It decays.
That's tied into theta, whichwe'll get to.
Speaker 2 (03:04):
Okay, so time is a big factor.
Then the source talks aboutvolatility, calls it the
wildcard.
Speaker 3 (03:10):
Yeah, this is where things get spicy.
It's about how much the stockis expected to jump around.
Speaker 2 (03:15):
Like that drunk squirrel on espresso line they
used.
Speaker 3 (03:20):
Huh, yeah, exactly, if a stock is expected to be
really erratic, really volatile,the options get more expensive,
much more expensive.
Speaker 2 (03:29):
Because there's a higher chance of a big winning
move for the buyer.
Speaker 3 (03:32):
Precisely so.
The seller demands a higherpremium to compensate for that
risk of a big payout.
Speaker 2 (03:38):
And it's key that it's about the expectation of
movement right, the impliedvolatility, even if the stock is
sitting still now, if everyonethinks it's about to go wild.
Speaker 3 (03:47):
That's implied volatility or 5E.
It's the market's forecastbaked into the option price and
you see it spike around certainevents like earnings reports or
Fed announcements.
Classic examples Uncertaintygoes up, traders brace for big
moves, boom IV shoots up andthose option premiums get
inflated.
Speaker 2 (04:07):
Which leads to that point.
The source made about smarttraders.
Speaker 3 (04:10):
Right, they often look to sell that premium before
those events.
They leads to that point.
The source made about smarttraders Right, they often look
to sell that premium beforethose events.
Speaker 2 (04:13):
They're collecting that high price.
Speaker 3 (04:15):
Exactly.
They're betting the fear.
The expectation is overgun.
They collect the inflatedpremium hoping it collapses
after the news is out andreality sets in.
Speaker 2 (04:24):
Okay, so intrinsic value, time value, volatility.
Now the source mentions theGreeks, kind of working behind
the scenes.
Speaker 3 (04:31):
Yeah, the Greeks Sounds intimidating maybe, but
they're just measures ofsensitivity, how the premium
reacts to different things.
The source keeps it simple.
Speaker 2 (04:39):
Okay, simplifying, then Delta.
That's roughly how much theoption price changes for every
$1.
The stock moves.
Speaker 3 (04:46):
Yep, basically Directional sensitivity.
Speaker 2 (04:48):
Gamma that's how much the delta itself changes, like
acceleration.
Speaker 3 (04:52):
Good way to put it how delta speeds up or slows
down.
Speaker 2 (04:54):
Then theta.
That sounds important.
It's how much value the optionloses just because time passes
like per day.
Speaker 3 (05:01):
Exactly that.
Daily time decay the sourcenails it.
Enemy for the buyer, friend forthe seller.
It's always ticking.
Speaker 2 (05:08):
Right, and the last one mentioned is vega.
Speaker 3 (05:10):
Vega.
That measures sensitivity tochanges in implied volatility If
IV goes up 1%.
Vega tells you roughly how muchthe option price should
increase or decrease if IV falls.
Speaker 2 (05:21):
Okay, and the really key takeaway, the source pulled
out about these Greeks.
It's about who they tend tofavor right, especially time and
volatility.
Speaker 3 (05:28):
Yeah, generally speaking, for option buyers,
time and volatility often workagainst them.
Theta is constantly eating awayat their premium.
Speaker 2 (05:36):
Every single day.
Speaker 3 (05:37):
Every day, and beta can hurt too If they buy when IV
is high and then IV drops,which often happens after news.
Speaker 2 (05:44):
Like after earnings.
Speaker 3 (05:45):
Right.
The premium can shrink becauseof vega, Even if the stock moves
slightly.
The right way it's that IVcrush.
Speaker 2 (05:51):
But for sellers it's flipped, Totally flipped.
Speaker 3 (05:53):
They collect the cash up front.
Beta decay that's money intheir pocket, metaphorically
speaking.
Speaker 2 (05:59):
Each day the option loses time, value and if IV
drops after they sold, high,vega helps them too, making the
option cheaper to potentiallybuy back.
So time, decay and falling IVcan be the seller's best friends
.
Speaker 3 (06:11):
Often yes.
Speaker 4 (06:14):
Ever wasted time hunting for the perfect options
trade, only to find out thestock has no volume or the
spreads are trash.
That's why we created theUltimate Watch List a list of
the top 144 stocks for optionstraders in 2025.
We ran thousands of stocksthrough over a dozen filters.
Only the best made the cut.
These are the names with realmovement, strong premiums, tight
(06:37):
spreads and the kind of openinterest you want to see.
Grab it for free atweloveoptionscom.
Slash stocks list and skip theguesswork on your next trade.
Speaker 2 (06:48):
The source also touches on a couple of other,
maybe smaller factors interestrates and dividends.
Speaker 3 (06:53):
Yeah, they're technically in the pricing
models, the math behind it all.
Interest rates matter a bitmore for really long-term
options.
Aeps, you know, not usually ahuge deal for short-term trades.
Speaker 2 (07:05):
And dividends.
Speaker 3 (07:06):
Dividends can nudge prices, yeah, especially around
the ex-dividend date because thestock price is expected to drop
by the dividend amount.
It slightly changes the gamefor calls and puts around that
time.
Speaker 2 (07:16):
But mostly noise for short-term stuff compared to the
big three.
Speaker 3 (07:20):
Generally, yes.
Intrinsic time and volatilityare the main drivers you feel
day to day.
Speaker 2 (07:25):
Okay, and then there's one more influence the
source brings up Just plain oldsupply and demand.
Speaker 3 (07:31):
Market psychology.
Sometimes the price isn't justabout the neat math.
Speaker 2 (07:35):
Right, like if a stock is suddenly meme-worthy
and everyone rushes to buy calls.
Speaker 3 (07:39):
Exactly that.
Sheer buying pressure can pushpremiums up beyond what the
models might say Just demandoutstripping supply.
Speaker 2 (07:48):
Or the opposite, If everyone's suddenly terrified
and selling puts like crazy thatcan depress their prices.
Speaker 3 (07:53):
Yeah, and the point the source makes isn't that you
need to predict these moodswings perfectly.
It's more about recognizingwhen supply and demand might be
making an option look you know,unusually expensive or cheap
relative to the underlyingfactors, spotting potential
mispricings.
Speaker 2 (08:08):
That Tesla earnings case study they used was perfect
for illustrating this.
Speaker 3 (08:12):
Oh yeah, the TSLA example Classic Stocks around
$250 before earnings Hugeanticipation.
Speaker 2 (08:19):
Everyone was betting on a massive move.
People loading up on calls andputs.
Speaker 3 (08:22):
Which did what Sent implied volatility absolutely
soaring.
The source said over 100%.
Speaker 2 (08:28):
Crazy high.
And they specifically mentionedthe weekly $250 straddle,
buying the call and the put atthe $250 strike.
Speaker 3 (08:36):
And that straddle cost over $30.
Think about that.
To break even, let alone profit, tesla stock needed to move
more than $30 away from $250 upor down by Friday's close.
That was the market's bet,priced into that premium.
Speaker 2 (08:51):
A $30 plus move expected in just a few days.
So what actually happened?
Earnings dropped.
Speaker 3 (08:56):
Stock moved about $8.
Speaker 2 (08:58):
$8, not $30.
Ouch.
Speaker 3 (09:00):
Ouch is right For the buyers who paid that $30
premium.
Their straddles got absolutelycrushed, demolished.
Speaker 2 (09:06):
Because the actual move was tiny compared to the
expected move priced in.
Speaker 3 (09:09):
Exactly, and time passed.
Ivy collapsed after theearnings uncertainty was gone.
The value just vanished.
Buyers lost big time.
Speaker 2 (09:16):
So who won?
Speaker 3 (09:17):
The sellers, the folks who looked at that $30
shadow price and thought, whoa,the market's expectation seems
way out of whack here.
A $30 move is nuts.
They sold it, collected thatfat $30 premium up front and
watched it decay into almostnothing when the huge move
didn't happen.
Speaker 2 (09:36):
Textbook pricing disconnect, like the source
called it.
Speaker 3 (09:39):
Perfectly put.
The premium reflected anexpectation that reality just
didn't deliver.
Understanding premium helps youspot those disconnects.
Speaker 2 (09:47):
Okay, so let's tie this together.
What are the practical thingsthe source says you, the
listener, can actually do withthis knowledge?
Speaker 3 (09:54):
Well, first obvious one look for spots where IV
seems really high, maybehistorically high for that stock
, and consider selling premium.
Then you collect more cash forthe risk.
Speaker 2 (10:03):
Makes sense.
It also suggests maybe beingwary of buying options that are
mostly time value, especiallyway out of the money ones.
Speaker 3 (10:11):
Yeah, unless you have a very specific, strong reason
or strategy, that time value isalways melting.
Speaker 2 (10:16):
And watch the Greeks right, Know your theta and vega.
Speaker 1 (10:27):
Definitely options volume.
If you're not taking advantageof them, you're leaving serious
opportunity on the table.
Lucky for you, there is a newfree guide called Mastering the
Art of Zero DTE and One DTEOptions.
Inside you'll learn what totrade, how to avoid assignment
and the real risk managementtricks pros use to grow their
(10:50):
accounts without losing sleep.
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Speaker 3 (11:11):
Understand how that daily decay, theta and potential
IV changes, vega, are going toaffect your position.
Whether you're long or short,the option.
Speaker 2 (11:19):
And the source seemed pretty down on just nakedly
buying calls or puts rightbefore something like earnings.
Speaker 3 (11:25):
Generally, yeah, because you're often paying peak
IV, which is likely to getcrushed right after the news
hits, unless, again, it's partof a spread or strategy designed
for that.
Speaker 2 (11:36):
But if you are a seller, use data.
Let it work for you.
Speaker 3 (11:41):
Let time be your friend.
Collect premium.
Let it decay day by day.
Speaker 2 (11:45):
So, bottom line, it's not about being a math whiz,
necessarily.
It's about understanding theforces.
Speaker 3 (11:49):
Exactly Intrinsic value, what's real now?
Time value, the potential,volatility, the market's fear or
excitement, the Greeks howsensitive it is and, yeah,
sometimes just raw supply anddemand.
Speaker 2 (12:01):
Understanding how the price is built helps you think
differently.
Not sometimes just raw supplyand demand.
Understanding how the price isbuilt helps you think
differently.
Not just hoping for a direction, but seeing the dynamics.
Speaker 3 (12:07):
Maybe it lets you think more like the house, as
the source hints, getting paidto take on the risk that buyers
are betting on.
Speaker 2 (12:13):
So, wrapping up, the big message from the source
seems to be that premium numberisn't just a price, it's telling
a story.
Speaker 3 (12:21):
Yeah, it's a whole narrative packed in there Market
fear, greed, hope, the clockticking.
It's all quantified in thatsingle number is the market
consensus on what might happen.
Speaker 2 (12:31):
So next time you look at an options chain, don't just
glance at the strikes and dates.
Really look at the premium.
Speaker 3 (12:36):
Ask yourself why it costs what it costs.
What is it telling you aboutexpectations?
Speaker 2 (12:40):
Which leads right into that final thought.
The source leaves us with Kindof a challenge for you, the
listener.
Speaker 3 (12:45):
Right Now that you understand what goes into that
premium, what story it's tellingabout market expectations, your
job is to decide.
Speaker 2 (12:53):
Do you agree with the market's story?
Speaker 3 (13:00):
Does that expectation , reflected in that price, seem
reasonable to you?
And then you trade based onyour own analysis of whether the
market's got it right or wrong.
That's the game.
Speaker 4 (13:07):
This is an AI podcast based on educational material
from Option Genius.
Speaker 2 (13:12):
Visit us today at optiongeniuscom.
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