What Is the Mathematical Relationship between Premium, Intrinsic Value, and Time Value?
The relationship is an additive one: Option Premium = Intrinsic Value + Time Value (or Extrinsic Value). The premium is the total price paid for the option.
The intrinsic value is the immediate profit, and the time value is the remaining portion that accounts for the probability of future profit and time remaining. This equation holds true for all options, regardless of their moneyness.
Glossar
Time Value
Duration ⎊ The temporal dimension inherent in cryptocurrency derivatives, options trading, and financial instruments fundamentally defines time value.
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
Mathematical Relationship
Calibration ⎊ Mathematical relationships within cryptocurrency, options trading, and financial derivatives frequently necessitate calibration to observed market data, ensuring model parameters accurately reflect prevailing conditions.
Intrinsic Value Component
Value ⎊ Within cryptocurrency, options trading, and financial derivatives, the intrinsic value component represents the inherent worth of an asset, independent of market sentiment or speculative pricing.