Why Does an ITM Option Have a Higher Premium Compared to an OTM Option with the Same Expiration? ▴ Learn

Why Does an ITM Option Have a Higher Premium Compared to an OTM Option with the Same Expiration?

An ITM option has a higher premium primarily because it possesses intrinsic value, which is the immediate, non-zero profit upon exercise. OTM options have zero intrinsic value, meaning their premium is solely time value.

Since the ITM option's premium includes both intrinsic value and time value, it will always be greater than the OTM option's premium, which only contains time value.

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