Define “Intrinsic Value” and “Time Value” of an Option

Intrinsic value is the immediate profit that an option holder would realize if they exercised the option immediately. It is the positive difference between the underlying price and the strike price (or vice-versa) and is zero for at-the-money or out-of-the-money options.

Time value, or extrinsic value, is the portion of the option's premium that exceeds its intrinsic value. It represents the value derived from the possibility that the option will move further in-the-money before expiration.

Time value decays to zero at expiration.