Premium Compression

Premium compression occurs when the market price of an option drops, typically due to a decrease in implied volatility or the passage of time. This can lead to losses for those holding long options positions, even if the underlying asset price remains stable.

Premium compression is a common occurrence after major market events or announcements, as the initial uncertainty subsides. Traders must be aware of this risk when purchasing options, as a "volatility crush" can significantly reduce the value of their positions.

In the crypto market, where sentiment shifts rapidly, premium compression is a frequent and impactful dynamic.