A buyer of a call option expects the
market to rise above the reference or strike price of the option
whilst a seller does not expect the market to reach or go above
that point. The premium the seller will charge for a call
option will depend on a number of factors. How long does the buyer
want the contract for? Clearly the longer the timeframe the more
chance there is of the market reaching and going above the strike
price. The second is how close the strike price is to the current
market price. If gold is trading at $1440 and a call option buyer
is looking for a 3 month option with a strike price of $1450 the
seller is going to want a hefty premium as the chances of the
market rising above $1450 any time in the three months are quite
high.
The other element to be considered before the premium is set is
the relative volatility of the underlying market.Options trading
on volatile markets such as oil will have higher premiums as
extreme market movements are likely during times of civil unrest in
the key oil producing areas. Options on less volatile markets such
as interest rate futures will result in lower premiums paid for
option buyers