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What are intrinsic value and time value in options?
Understand the two components that can make up an option premium before expiration
Prepared by Mark · Primary sources below
Direct answer
An option premium can contain intrinsic value and time value. Intrinsic value is the amount an option is in the money, while time value is the premium above intrinsic value. Out-of-the-money options have no intrinsic value, so their premium consists entirely of time value before expiration
Intrinsic value is the immediate exercise value
For a call, intrinsic value is the underlying price above the strike. For a put, it is the strike above the underlying price. This component is zero when the option is at or out of the money
Time value is the amount above intrinsic value
Before expiration, an option can retain value because the underlying still has time to move. Implied volatility, remaining time, interest rates, and dividends can all affect this part of the premium
The components change as conditions change
A stock move can change intrinsic value, while time passing often reduces time value when other inputs are held constant. The live premium also reflects market quotes, so it should not be treated as a fixed theoretical amount
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