Sun. Aug 9th, 2020

Options Funda

All about options and its strategies

Intrinsic value and Time value of an option

1 min read
Intrinsic Value
 
The option premium can be broken down into two components – intrinsic value and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM.
If the call is OTM, its intrinsic value is zero.
Putting it another way, the intrinsic value of a call is Max[0, (S t — K)]  which  means  the  intrinsic  value of a call is the greater of 0 or (St — K). Similarly, the intrinsic value of a put is Max[0, K — St],i.e. the greater of 0 or (K — St).  K is the strike price and St is the spot price.
 
Time Value
 
The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option is ATM. The longer the time to expiration, the greater is an option’s time value, all else equal. At expiration, an option should have no time value.
 

In this case, Banknifty spot price is 31000 and the ITM call strike 30900 have premium of 363 which interprets the intrinsic value of 100 and 263 as the time value.

Likely for ITM put strike 31200 have premium of 363 which interpets the intrinsic value of 200 and time value of 100.

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