Intrinsic vs Time Value

Every option's price (premium) is made up of two components: intrinsic value and time value.

Intrinsic Value

Intrinsic value is the "real" value of an option if it were exercised right now. It's the amount the option is in-the-money.

• Call: max(Stock Price − Strike, 0)
• Put: max(Strike − Stock Price, 0)

If a stock trades at $105 and you hold a $100 call, the intrinsic value is $5. An out-of-the-money option has zero intrinsic value.

Time Value

Time value (also called extrinsic value) is everything above the intrinsic value. It represents the possibility that the option could become more valuable before expiry.

Time value is influenced by: time to expiry (more time = more value), implied volatility (more uncertainty = more value), and interest rates.

Time Decay (Theta)

Time value decays as expiration approaches — this is theta. The decay accelerates exponentially in the final weeks before expiry. This is why option sellers love time and option buyers fight against it.