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What Is the Relationship between an Option’s Premium, Intrinsic Value, and Time Value?

Premium equals the sum of intrinsic value (current profit) and time value (potential profit).
Greeks.Live22.11.25

What Is the Relationship between an Option’s Premium, Intrinsic Value, and Time Value?

An option's premium is the total price paid by the buyer to the seller. This premium is mathematically equal to the sum of its intrinsic value and its time value.

Premium = Intrinsic Value + Time Value. If an option is out-of-the-money, its intrinsic value is zero, and the premium consists entirely of time value.

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