1. The “Formula” of Royalty Premium
Imagine you go to the market to buy fish. The price of fish depends on freshness, season, and even weather. The price of option premium is also like a pot of hodgepodge, made up of three main ingredients:
Intrinsic value : the quality of the fish itself
Tesla's current price is $200, and the call option with an exercise price of $180 has an intrinsic value of $20 (current price - exercise price).
Bitcoin is currently priced at $80,000, and the call option has an exercise price of $82,000? The intrinsic value is zero at this time - the fish has not been caught yet
Time value : the shelf life premium of fish
For Tesla's same $200 exercise price call, the one that expires in one month may be sold for $5, and the one that expires in six months may be sold for $20.
Bitcoin options are even more exaggerated: the time value before a major event can double, just like the seafood market hearing that a typhoon is coming and immediately raising the price
Volatility premium : The scare fee for the haunted fish market
Before Tesla's financial report, option volatility soared from 40% to 80%, and the premium doubled
Bitcoin encounters regulatory turmoil, and the volatility premium of options can account for 70% of the premium
Last year, a Wall Street trader complained: "The pricing of Bitcoin options is like betting on the size of a casino - a contract that was worth $5,000 yesterday became $10,000 after Musk sent a tweet."
2. Vegetable Market Economics: Actual Pricing of Premiums
Scene 1: Fish in a calm pond (low volatility environment)
Background : Tesla's stock price has been trading sideways at $200 for two weeks, and there is still a 30-day call option price before the financial report:
Strike price $210 (slightly out-of-the-money): Premium $8
Time value ratio: 90% (intrinsic value is 0)
Volatility: 35%
At this time, the premium is like frozen fish, and the price depends mainly on the shelf life (time value) and storage cost (funding interest rate). Market makers quote prices slowly while drinking coffee, and the bid-ask spread may be as little as $0.1.
Scenario 2: Fish market on a typhoon day (high volatility environment)
Background : Bitcoin suddenly rose from 30,000 to 50,000. Rumor has it that the US passed the ETF call option price change :
Weekly contract with a strike price of $36,000: From $300 to $2,200 in 15 minutes
Volatility from 65% to 110%, time value ratio drops to 40%
Market makers frantically adjusted prices, and the bid-ask spread widened to 5%
The pricing at this time is like the price of rice during a famine, and panic makes the volatility premium dominate everything.
Scenario 3: The fishmonger’s black box operation (market maker pricing model)
Market makers have a secret weapon on their trading desks: volatility surface models. They will:
Calculating the underlying volatility using historical data
Overlaying real-time order flow (e.g., a sudden influx of Tesla call option buy orders)
Add exclusive data (such as satellite monitoring of parking numbers at Shanghai factories)
Finally, he offered: "Tesla will sell you 210 calls next month for $7.5."
But the Bitcoin market is even more wild, and small exchanges may directly refer to the spot price of Binance, and the volatility parameters are all up to the boss. It is said that a platform once entered "vol" (volatility) as "vodka" (vodka), and the system reported an extremely low price, and the arbitrageurs took away 200 Bitcoins in 10 seconds.
3. The tuition fees we paid in those years
Case 1: The “boiling frog in warm water” of time value
My friend Lao Wang bought Tesla quarterly call options in 2021:
Buy a call option with a strike price of $250 on January 1st, expiring in June, for $3,000
By March, the stock price rises to $230, and the option is worth $4,500
But he wanted to "wait for it to rise a little more", and as a result, the stock price fell back to $210 in May, and the option was only worth $500.
Lesson : Time value decay is not linear, and will accelerate in the last 30 days, like melting ice cream.
Case 2: The Volatility Trap’s Backfire
When Bitcoin was trading sideways at 28,000 last year, Xiao Li discovered:
Weekly call options with an exercise price of $30,000 are only $500
He calculated that "as long as it rose by 7%, I could get my money back" and bet on 10 shares.
As a result, Bitcoin really rose to 30,000, but the volatility plummeted from 70% to 40%, and the option was only worth $600
It's like you bought a good knife, but suddenly the market stopped favoring cutting wood and started growing flowers, and the weapon depreciated in value.
Case 3: Liquidity’s “Invisible Assassin”
A miner wants to hedge 500 bitcoins:
Buy a put option with an exercise price of 25,000 USD, and the market price is 2,000 USD
But when I actually placed the order, I found that the first 10 copies cost $2,000, and the rest cost $2,100.
The final average price was $2,050, an extra $25,000
This reminds us that large transactions should be made in batches, and we should not be like an elephant in a china shop.
4. Battle for pricing power: a life-and-death game between retail investors and institutions
Wall Street’s “Advanced Game”
Morgan Stanley developed a "weather options pricing model" last year:
Predicting Rainfall in the U.S. Corn Belt Using Weather Satellites
Plan ahead for agricultural futures options
Before the drought warning was issued, the volatility premium of corn options increased by 30%
The “homemade steelmaking” of retail investors in the cryptocurrency circle
The crypto guy on Reddit invented an alternative indicator:
Monitor the time when Coinbase CEO sends tweets (there is a high probability of sending good news late at night)
Counting the number of large transfers on Binance (frequent transfers may indicate selling)
Even using the movie "The Wolf of Wall Street" viewing volume to predict market sentiment
Some people actually relied on these metaphysical theories to catch three surges in 2023, turning their $5,000 capital into $150,000. But more people learned this trick and ended up losing so much that they even sold their graphics cards.
5. Your Premium Operation Manual
Grocery shopping tips
Buy options when volatility is low (like stocking up on down jackets during off-season)
Sell options when volatility is high (like selling air conditioners in the summer)
Avoid buyers when time value decays fastest (don’t catch a flying knife a week before expiration)
Tesla in action
Three days before earnings: Buy a straddle (buy both calls and puts)
After a month of sideways trading: Sell wide straddle (betting on falling volatility)
Breaking recall news: Close sell positions immediately
Bitcoin Rules
Before a major upgrade: only buy, no sell (e.g. volatility surged to 150% during the Taproot upgrade)
Exchange reserves drop sharply: Buy put options immediately (to prevent bank run risk)
US CPI data release day: plan ahead for two-way options
Remember what the guy who got liquidated on BitMEX said: "Playing options is like chasing a girl. Being too enthusiastic will scare her away, and being too cold will make you miss the opportunity."
6. Next Issue Preview
Tomorrow we will analyze the relationship between exercise price and underlying assets.
After-class tasks :
Compare Tesla's call options with different strike prices on the same expiration date and calculate the time value decay rate of each option
Observe Bitcoin options on Deribit and record the change in volatility premium before and after a surge
Leave a message to share your most thrilling "premium roller coaster" experience
