Intrinsic value refers to the difference between the market value and strike value when the option is in the money. The time value is calculated based on its potential to increase in future before the expiry date. That’s why for speculative stocks, the time value increases the premium because of high potential to increase. The total value of an option is the sum of its intrinsic value and time value.
Option Value = Intrinsic Value + Time Value
Whether an Option is “In-the-money” or “At-the-money” or “Out-of-the-money” is decided based on the current payoff of the option contract, if exercised immediately. If the immediate exercise of the option contract will result in positive payoff, then it is termed as “In-the-money”, if the payoff is negative, then it is termed as “Out-of-the-money”. If immediate exercise does not make any profit or loss for the buyer then it is termed as “At-the-money” contract.
Examples for Call Options:
Examples for Put Options:
These are used to check the profitability of options at any point of time before the expiry date and also used to determine the premium for an option.