 How do they come up with premiums? Well, options are generally valued using pricing theory and or pricing models. One of the more popular models used for option valuation is the Black Shoals model. Now, some of the large firms that actually buy and sell options, they'll write options, they may have some proprietary models that were developed by some quantitative analysts. Here is what the inputs look like on a Black Shoals model. As an example, one can evaluate options value and contract expiration. As previously stated, at expiration, the contract has no time value and won't expect the options value to be solely intrinsic. So if you have a model and I've put a Excel spreadsheet out in Angel under the Lesson Resources, it's an example of Black Shoals model. And these will be the inputs. The asset price, that's the current market price. And this scenario, the current market price for Crudo was $50. The desired strike price for the option was $55. So in this particular case, this would be a call option. The time to expiration and the spreadsheet, you enter in the number of days to expiration in the one cell and it automatically calculates this fraction. The risk-free rate, you have to put in an interest rate because the idea is you are paying the premium at the time that you execute the options contract. So there's cash sitting out there, which could be drawing interest as an alternative. So this is your so-called opportunity cost. And then the volatility, you're going to get that from the marketplace, the daily implied volatility. D1 and D2, those are deltas. Do not worry about those. But you can see what it spits out are call values and put values. So a call value is going to cost you $0.72 to get a $55 call in a $50 market with those other parameters that you've entered into it. From the put side, and again, remember, the put allows you to sell at a certain price level. Well, if we look at this, if you want to sell at $55 and the market is $50, well, obviously the intrinsic value is $5. So at a minimum, it's going to cost you $5. And in this scenario, though, the extrinsic value of it is $0.72 as well. One can also anticipate the value utilizing basic understandings. The purchaser of a call option is anticipating the price of the underlying security to increase. So one would expect the call options value to increase with an increase in commodity prices. If the strike price were higher than the actual commodity price, the option should have little to no value. So some of the learning points of these things, the purchaser of a call option expects the price of the future contract to increase. So their sentiment or their outlook is that they're bullish on the underlying commodity. If they think prices are going to go up, they would enter into a call option. The purchaser of a put option expects the price of the future contract to decrease. So their sentiment is bearish on the underlying commodity. They expect prices to fall. And as a result, they want to establish a floor price. Options are referred to as being asymmetrical. It's a right but not an obligation for the buyer of the option. Options are financial in nature. Delivery of the physicals is relatively rare. And options premium typically moves in concert with an options valuation. That only makes sense because you're going to put a value on the option and the premium should be the result of those calculations. At expiration, the time value portion of the premium is equal to zero. So in other words, on the day of expiration, all you've got left is intrinsic value. What's the strike price on the options contract versus the asset or market value at the time? And then options trading is a zero-sum game. We talked about this with the underlying futures and forwards contracts. For every buyer, there's a seller and vice versa. Same thing here. If you want to buy an option, there has to be a seller in the marketplace. Options, rights, and obligations. So let's break this down a little bit. In terms of call options, the actual buyer has the right to buy a futures contract at a predetermined price on or before a defined date. They expect prices to rise. They want to establish a ceiling price, a price at which they're guaranteed to purchase the underlying contracts. The seller on the other side, they're granting that right to the buyer. So they have the obligation to sell futures at the predetermined price at the buyer's sole option. In other words, the seller or the option can't call up the buyer and say, hey, I would really like you to go ahead and exercise these. It is up to the buyer. In terms of a put option, this gives the buyer the right to sell futures contracts at a predetermined price on or before a defined date. Why? Because their expectation is the prices will fall, and they want to establish a floor price, a guaranteed minimum price. The seller then grants the right to the buyer, so they've got the obligation to potentially have to buy futures at a predetermined price, which is the price stated in the contract, the strike price, at the buyer's sole expectation. The seller, in this case, they're expecting neutralizing prices. So in other words, if they sell a put option, their hope is that the prices don't ever fall. If they stay the same, they're going to collect the premium, and they won't have to pay anything out. But if prices rise, the same thing happens as well. They're not going to have to purchase contracts in a falling marketplace. Again, here's just the determinative options prices themselves. If there's an increase in the underlying price, that's going to increase the value of the call, and it'll decrease the value of the put. If there's an increase in the strike price, that's going to lower the call value and increase the put value. If volatility increases, both the value of the call and the put are going to increase. I mean, as you can imagine, if there's volatility in the marketplace, then those models, like the black-shells and others, are going to reflect that added volatility. So the risk or the exposure by the writers of the option is going to increase. Time to expiration, if the further the time out from the time you enter into the options contract until expiration, both the put value and the call value could also increase. And then interest rates. If there's an increase in the interest rate, both the call value and the put value are going to decline.