Stock Trading Strategies, Tips & Software | Options Premiums -- Intrinsic Value and Time Value

The premium you pay or receive for an option is comprised of two parts, The intrinsic value and the time value.

The intrinsic value of the option is determined by the relationship between the strike price of the option and the current stock price.  The intrinsic value is always zero or more.

The time value of an option is any amount in the premium over the intrinsic value.  The time value is determined by the amount of time remaining until expiration of an option and of the volatility of the market in general and the stock price in particular.  Everything else being equal, the time value of an option decreases as expiration approaches, and decreases more rapidly the closer it gets to expiration.  Everything else being equal, the time value of an option increases as volatility increases, and decreases as volatility decreases.

If the Stock Price is LESS THAN the Strike Price,
  the option is Out-of-the-Money (OTM).
    the Intrinsic Value is 0 (zero).
    the Time Value EQUALS the Premium.

          If StockPrice < CallStrikePrice
            IntrinsicValue = 0
            TimeValue = CallPremium

If the Stock Price is GREATER THAN OR EQUAL TO the Strike Price,
  the option is In-the-Money (ITM) -- At-the-Money (ATM) if EQUAL.
    the Intrinsic Value is the Stock Price less the Strike Price.
    the Time Value EQUALS the Premium less the Intrinsic Value.

          If StockPrice >= CallStrikePrice
            IntrinsicValue = StockPrice - CallStrikePrice
            TimeValue = CallPremium - IntrinsicValue

          ============================================================

          -------- Stock price (above call option strike price)
              |    Call option is In-the-Money (ITM)
              |    Call premium includes both intrinsic value and time value
              |
              |--- Call option intrinsic value
              |
          -------- CALL OPTION STRIKE PRICE


          -------- Stock price (below call option strike price)
                   Call option is Out-of-the-Money (OTM)
                   Call premium is comprised of time value only
                   (No intrinsic value)

If the Stock Price is GREATER THAN the Strike Price,
  the option is Out-of-the-Money (OTM).
    the Intrinsic Value is 0 (zero).
    the Time Value EQUALS the Premium.

          If StockPrice > PutStrikePrice
            IntrinsicValue = 0
            TimeValue = PutPremium

If the Stock Price is LESS THAN OR EQUAL TO the Strike Price,
  the option is In-the-Money (ITM) -- At-the-Money (ATM) if EQUAL.
    the Intrinsic Value is the Strike Price less the Stock Price.
    the Time Value EQUALS the Premium less the Intrinsic Value.

          If StockPrice <= PutStrikePrice
            IntrinsicValue = PutStrikePrice - StockPrice
            TimeValue = PutPremium - IntrinsicValue

          ============================================================

          -------- Stock price (above put option strike price)
                   Put option is Out-of-the-Money (OTM)
                   Put premium is comprised of time value only
                   (No intrinsic value)

          -------- PUT OPTION STRIKE PRICE
              |
              |--- Put option intrinsic value
              |
          -------- Stock price (below put option strike price)
                   Put option is In-the-Money (ITM)
                   Put premium includes both intrinsic value and time value

A Core Position is defined as a core or basic position in a readily tradable item, including such things as precious metal (PM) bullion or coins, stocks, mutual funds, exchange traded funds (ETFs), etc.  Whatever it is you are trading will here be called the "item".

A Core Position Account comprises a quantity of the item AND a cash reserve position.  The cash reserve position enables purchases adding to the quantity of the item from time to time.  Proceeds of the sales of some of the item, from time to time, are added to the cash reserve position.  The cash reserve position enables purchases adding to the quantity of the item from time to time...

Core Position Trading™  (CPT) is defined as buying or selling, adding to or subtracting from, the core position of the item in such a manner as to, over time, increase both the amount of the item AND the cash in the account.

More about Core Position Trading

Glossary of Stock and Options Trading Terms

Core Position Trading
  AIM Stock Buy & Sell Calculator

Technical Analysis
  Risk/Reward Calculator User Doc

Stocks and ETFs
  Stop, Limit, Stop Limit Orders

Stock Options
  Options - The Very Basics
  Options Premium Intrinsic & Time Value

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