When a futures option is purchased, the premium is paid in full by the purchaser to the broker. An option purchaser has no further obligation until the put option position is closed out or exercised. Example of premium values. The intrinsic value changes only when the price of the underlying futures contract changes. However, time value changes with both the price of the underlying contract and the passage of time.
Volatility is important because the more volatile the underlying contract, the larger the premium.
Greater volatility increases the premium because buyers are willing to pay more for price risk protection, and sellers demand a larger premium for their increased risk. The more time remaining before expiration, the greater the chances are for substantial price moves. Example strike price versus market price relationship. 74 Figure 4. The producer has a choice of selecting strike price and premium to fit desired price insurance, cash flow and income objectives.