What Is the Difference between Intrinsic Value and Time Value of an Option?

Intrinsic value is the immediate profit if the option were exercised now. It is the amount by which the option is in-the-money.

Time value, or extrinsic value, is the premium paid for the chance that the option will move further into the money before expiration. It is influenced by time to expiration, volatility, and interest rates.

An out-of-the-money option has zero intrinsic value, and its premium is purely time value.