What drives the option premium

The premium is the price of the option — what the buyer pays and the seller receives. Five inputs move it, and knowing them tells you why an option you own is gaining or losing value even when you were "right."

The five drivers

1. Underlying price — the biggest driver. Up helps calls, hurts puts; down does the reverse.
2. Strike price — fixed at purchase, but relative to spot it sets moneyness.
3. Time to expiry — more time = more premium (more chance of a favourable move). This value bleeds away as expiry approaches.
4. Volatility — higher expected volatility raises both call and put premiums, because a wider range of outcomes makes a profitable move more likely.
5. Interest rates — a smaller effect, raising call values and lowering put values slightly.

The non-obvious one: volatility

The first three are intuitive. The trap is volatility. You can buy a call, be right about direction, and still lose money if expected volatility falls after you bought — the premium you paid included a volatility expectation that did not materialize. This is "buying high implied volatility" and it punishes new traders constantly.

Why this leads to the Greeks

Each driver has a measurable sensitivity, and traders need to know how much the premium changes when each input moves. Those sensitivities have names — delta, gamma, theta, vega, rho — and they are the subject of the next chapter. They turn the vague idea of "the premium moves" into precise, usable numbers.