What type of risk is considered the premium paid for an option?

The premium paid for an option is classified as the maximum risk an option buyer faces when purchasing that option. This is because the premium represents the total amount that the option buyer can lose if the option expires worthless. Since the buyer of the option pays this upfront cost, it is the worst-case scenario for them.

In the context of options trading, liquidity risk relates to the ease of buying or selling an asset without impacting its price significantly. Market risk pertains to the potential for losses due to changes in the overall market or individual asset prices. Total risk encompasses all risks associated with an investment, including both market risk and specific risks; however, when specifically considering the single risk associated with purchasing an option, the premium is the maximum risk.

Thus, the correct answer highlights a fundamental aspect of options trading—understanding what the maximum potential loss is in a particular transaction.