1. Option Basics 1.1 Introduction

An option’s total premium is comprised of intrinsic value and time value. An option’s intrinsic value is equal to the amount the option is in the money. Time value is the amount by which an option’s premium exceeds its intrinsic value. In effect, the time value is the price an investor pays for the opportunity to exercise the option. An option that is out of the money has no intrinsic value; therefore, the entire premium consists of time value.

Example:

An XYZ June 40 call is trading at \$2 when XYZ is trading at \$37 per share. The June 40 call is out of the money and has no intrinsic value; therefore, the entire \$2 premium consists of time value. If an XYZ June 40 put is trading at \$3 when XYZ is at \$44 dollars per share the entire \$3 is time value.

If in the above example the options were in the money and the premium exceeded the intrinsic value of the option, the remaining premium would be time value.

Example:

An XYZ June 40 call is trading at \$5 when XYZ is trading at \$42 per share. The June 40

call is in the money and has \$2 in intrinsic value; therefore, the rest of the premium consists of the time value of \$3. If an XYZ June 40 put is trading at \$4 when XYZ is at

\$39, the put is in the money by \$1 and the rest of the premium or \$3 is time value.

Need Help Passing Your Series 4 Exam?

Introduction

Related Articles

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 ...

### The Basics Of Option Price

Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options.
3. Investing

### Discounted Cash Flow (DCF)

Discover how investors can use this valuation method to determine the intrinsic value of a stock.

### Cut Down Option Risk With Covered Calls

Covered call writing has pros and cons, If used with the right stock, they can be a great way to generate income. Learn this strategy today.

### Options Strategies for Your Portfolio to Make Money Regularly

Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
6. Taxes

### How Your Government's Budgetary Decisions Impact the Public Sector

Issues facing the public sector are not unlike some issues facing America’s oldest and largest companies, but with larger and broader impacts.

### Avoid Premature Exercise Of Employee Stock Options

The first rule of managing your employee stock options is to avoid premature exercises. With early exercise, you forfeit some profit back to your employer and incur an income tax penalty.