Chapter 8 · Options Basics
Intrinsic value, time value and moneyness
Every premium splits into two parts, and one of them decays to nothing.
15 of 66 · 9 min
| Component | Formula (call) |
|---|---|
| Intrinsic value | max(0, Spot − Strike) |
| Time value | Premium − Intrinsic value |
Intrinsic value is what the option would be worth if exercised right now. Time value is everything else — what the buyer pays for the chance that it improves before expiry.
Moneyness
- ITM (in the money) — has intrinsic value. Call with strike below spot.
- ATM (at the money) — strike ≈ spot. Time value is greatest here.
- OTM (out of the money) — no intrinsic value. Premium is entirely time value.
Worked
Spot Rs 520, call strike Rs 500, premium Rs 28.
- Intrinsic = 520 − 500 = Rs 20
- Time value = 28 − 20 = Rs 8
- That Rs 8 goes to zero by expiry regardless of what price does.
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