Series 3: 4.1.6.1. Intrinsic Value And Time Value

Taken from our Series 3 Online Guide

4.1.6.1. Intrinsic Value and Time Value

The value of a premium is made up of two components: intrinsic value and time value.

premium = intrinsic value + time value

Intrinsic value is the per unit amount that the holder of an option stands to gain by exercising it. Stated another way, it is the extent to which the option is in the money. If the market price of a futures contract is $40 and the strike price of a call option is $30, the intrinsic value of the option is the difference: $10. If the market price is $20 with a $30 strike price, the option is out of the money and the intrinsic value of the option is zero.

For in the money call options: intrinsic value = market price – strike price

For out of the money call options: intrinsic value = $0

Remember that a put option is in the money when the price of the underlying contract is below the strike price. Using the same example, if the strike price of a put option is $30 and the current market price of the underlying contract is $20, the option is in the money and the intrinsic value is $10. If the contract is selling at $40, the intrinsic value of the put option is zero.

For in the money put options: intrinsic value = strike price – market price

For out of the money put options: intrinsic value = $0

Time value is the residual difference between the intrinsic value and th

Since you're reading about Series 3: 4.1.6.1. Intrinsic Value And Time Value, you might also be interested in:

Solomon Exam Prep Study Materials for the Series 3
Please Enable Javascript
to view this content!