What Is the Difference between Intrinsic Value and Time Value in Option Pricing? ▴ Learn

What Is the Difference between Intrinsic Value and Time Value in Option Pricing?

Intrinsic value is the immediate profit realized if the option were exercised now. It is the difference between the underlying price and the strike price for ITM options, and zero for ATM and OTM options.

Time value, or extrinsic value, is the amount of the premium that is not intrinsic value. It reflects the probability of the option becoming profitable and is influenced by time to expiration and volatility.

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Define the Terms ‘Intrinsic Value’ and ‘Time Value’ for an Option Contract

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