What is intrinsic value?
A call’s intrinsic value is the amount by which the stock price exceeds the strike. It cannot be negative.
With the stock at $108, a $100 call has $8 intrinsic value. A $110 call has zero intrinsic value because exercising it would not provide an economic advantage.
What is time value?
Time value is the part of the premium above intrinsic value. It reflects the possibility that the option becomes more valuable before expiration.
If the $100 call trades for $10 while the stock is $108, it contains $8 intrinsic value and $2 time value.
Examples
| Stock | Strike | Premium | Intrinsic | Time value |
|---|---|---|---|---|
| $108 | $100 | $10 | $8 | $2 |
| $108 | $108 | $4 | $0 | $4 |
| $108 | $115 | $1.50 | $0 | $1.50 |
What affects time value?
- Time remaining: more time generally creates more opportunity for movement.
- Implied volatility: higher expected movement generally raises option value.
- Moneyness: near-ATM options often carry substantial time value.
- Rates and dividends: both can influence theoretical value.
Why time value decays
Every day removes some opportunity for a favorable move. Theta describes this effect. Time value reaches zero at expiration, leaving only intrinsic value. Decay often accelerates as expiration approaches.
This is why choosing an appropriate expiration date matters.
Why early exercise can waste value
Exercising a call captures intrinsic value but discards remaining time value. When a liquid option still contains time value, selling it may produce more value than exercising, although account goals and special circumstances matter.
Frequently asked questions
Can an OTM option have value?
Yes. Before expiration, its premium may consist entirely of time value.
Does time value always fall each day?
The passage of time works against it, but changes in stock price or implied volatility can offset that effect.
Continue the series
Review ITM, ATM and OTM calls, then learn how the bid-ask spread affects execution. Continue with the free Level 1 course.
Options involve risk. Educational content only; not investment advice.