How Does the Model Account for the Intrinsic Value of an Option?

The Black-Scholes model accounts for intrinsic value indirectly by using the underlying asset price and the strike price as two of its five inputs. The difference between these two inputs is the intrinsic value.

The model then calculates the time value (extrinsic value) based on the other inputs (time, volatility, risk-free rate) and adds it to the intrinsic value to arrive at the total theoretical option price.