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How Is an Option’s Premium Calculated Using Its Two Components?

Premium equals the sum of Intrinsic Value and Time Value. P = IV + TV.
Greeks.Live02.11.25

How Is an Option’s Premium Calculated Using Its Two Components?

The total premium of an option contract is the sum of its intrinsic value and its time value. Option Premium = Intrinsic Value + Time Value.

For an Out-The-Money option, the intrinsic value is zero, so the premium consists entirely of time value. For an In-The-Money option, the premium is the sum of its positive intrinsic value and its time value.

What Are the Two Main Components of an Option’s Premium?
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