This represents the sum of money the purchaser pays for the rights given by the option. This payment, in full, is made up-front to the writer at the time the option is purchased. The option is exercised, the purchaser has a short futures position at the strike price, and the put writer makes up the difference between the current futures price and the strike price. The option itself involves no futures position until it is exercised. Also, since premiums reflect option prices, they move up and down as the underlying commodity futures price changes.
Options premiums have two components called intrinsic value and time value.
Typically as the option approaches expiration its time value greatly diminishes. Since the strike price is fixed, traders in the few days before expiration have a clearer view of the difference between the market price and strike price-this difference has been bid into the market as time value. As expiration approaches, time value is bid close to zero. Intrinsic value of an option is either zero or positive depending upon the relationship between the strike price and the current market price. A futures contract represents 5,000 bushels of soybeans.