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What Are the Two Main Components That Make up an Option’s Premium?

The premium consists of intrinsic value (immediate profit if ITM) and time value (potential for future profitability).
Greeks.Live03.11.25

What Are the Two Main Components That Make up an Option’s Premium?

The option's premium is composed of two main parts: the intrinsic value and the time value (or extrinsic value). Intrinsic value is the immediate profit if the option were exercised (only present for ITM options).

Time value is the amount by which the premium exceeds the intrinsic value, representing the possibility that the option will move further ITM before expiration.

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