How Does Intrinsic Value Relate to an Option's Premium? ⎊ Path

How Does Intrinsic Value Relate to an Option’s Premium?

An option's premium is the total price of the option and is composed of two parts: intrinsic value and extrinsic (or time) value. Intrinsic value is the portion of the premium that is attributable to the option being in-the-money.

Any amount of the premium above the intrinsic value is the extrinsic value. For OTM and ATM options, the entire premium consists of extrinsic value since their intrinsic value is zero.

Therefore, Premium = Intrinsic Value + Extrinsic Value.

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