What Is the Primary Difference between Intrinsic Value and Time Value in an Option’s Premium?

The option premium is the total price paid, which is the sum of intrinsic value and time value. Intrinsic value is the immediate profit if exercised, based on the underlying price and strike price.

Time value, or extrinsic value, is the portion of the premium that reflects the probability of the option becoming profitable before expiration. Time value decays as the option approaches its expiration date.