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Why Options Are the Main Source of Time Premium

Article Quant Q&A · Author: Yatharth Narang
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Summary

The document asks whether a trader can sell an instrument other than an option to collect premium and fund a long equity call, while avoiding options tied to the same or a correlated underlying. The answer explains that options generally provide time premium: their prices include value associated with the possibility of favorable movement before expiry, which erodes over time, all else equal.

It also cautions against combining unrelated positions merely because one is intended to finance the other. Each leg should be assessed as an independent trade with its own risk and expected profitability. The response does not compare specific alternatives such as bonds, futures, or currency instruments, and it offers no quantitative evidence or complete financing strategy. Its central point is therefore a conceptual distinction between option time value and the proceeds from selling other assets, rather than a general method for funding calls.

Key ideas

  • Options generally contain time value that can decay as expiry approaches.
  • Selling another instrument does not necessarily collect an option-like time premium.
  • Evaluate each position on its own expected return and risk, even when one is meant to fund another.

Tags

OptionsDerivatives pricingRisk management
Full text
# What instruments help me receive a premium?


# What instruments help me receive a premium?












Apart from selling options , what other instruments can I trade(sell) to collect a premium ? The main problem that I face is as follows :

I am buying a Call option which I would like to fund by selling something else . I want to avoid selling an option in the same underlying or a correlated underlying . A solution to this would be to go for Commodity or Currency options (since the call option I am buying is in Equity markets) . Apart from options is there any other instrument that can be sold to collect the premium (to fund the call) ?

## Answer by optionstrade.info (score 4, accepted)

https://quant.stackexchange.com/a/32994

no, generally speaking only options has time premium. I strongly advise you to avoid mixing 2 positions (short 1 option, long another one) in your mind just because they are independent, so just consider each leg as an independent trade which should be profitable by itself, without other legs.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.