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.
Glossar
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.
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.