The two components of an option premium are the intrinsic value and time value of the option. The intrinsic value is the difference between the underlying's price and the strike price  or the inthemoney portion of the option's premium. Specifically, the intrinsic value for a call option is equal to the underlying price minus the strike price. For a put option, the intrinsic value is the strike price minus the underlying price.
Intrinsic Value (Call) = Underlying Price – Strike Price 
Intrinsic Value (Put) = Strike Price – Underlying Price 
By definition, the only options that have intrinsic value are those that are inthemoney. For calls, inthemoney refers to options where the strike price is less than the current underlying price. A put option is inthemoney if its strike price is greater than the current underlying price.
IntheMoney (Call) = Strike Price < Underlying Price 
IntheMoney (Put) = Strike Price > Underlying Price 
Any premium that is in excess of the option's intrinsic value is referred to as time value. For example, assume a call option has a premium of $9.00 (this means that the buyer pays  and the seller receives  $9.00 for each share of stock, or $900 for the 100share contract). If the option has an intrinsic value of $7.00, its time value would then be $2.00 ($9.00  $7.00 = $2.00).
Time Value = Premium – Intrinsic Value 
In general, the more time to expiration, the greater the time value of the option. It represents the amount of time the option position has to become profitable due to a favorable move in the underlying price. In most cases, investors are willing to pay a higher premium for more time (assuming the different options have the same exercise price), since time increases the likelihood that the position will become profitable. Time value decreases over time and decays to zero at expiration. This phenomenon is known as time decay.
An option premium, therefore, is equal to its intrinsic value plus its time value.
Option Premium = Intrinsic Value + Time Value 
Options Pricing: Factors That Influence Option Price

Trading
What Is Option Moneyness?
Get the basics under your cap before you get into the game. 
Trading
Understanding Option Pricing
Take advantage of stock movements by getting to know these derivatives. 
Investing
What Is The Intrinsic Value Of A Stock?
Intrinsic value can be subjective and difficult to estimate. It’s a perception of a security’s value that factors tangible and intangible factors. 
Trading
The Options Premium
An options premium is the amount of money that investors pay for a call or put option. The two components that affect options pricing are the intrinsic value and time value. Matthew is interested ... 
Trading
Getting A Handle On The Options Premium
The price of an option, otherwise known as the premium, has two basic components: the intrinsic value and the time value. Understanding these factors better can help the trader discern which ... 
Trading
What Does It Mean When an Option is At The Money?
The strike price of an atthemoney options contract is equal to its current market price. Options that are at the money have no intrinsic value, but may have time value. 
Investing
What Is The Intrinsic Value Of A Stock?
Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals. 
Trading
How To Avoid Closing Options Below Intrinsic Value
To get the best return possible on your options trading, it is important to understand how options work and the markets in which they trade. 
Trading
The Importance Of Time Value In Options Trading
Move beyond simply buying calls and puts, and learn how to turn timevalue decay into potential profits.