Part 4 Learn Instiutitonal Trading

Intrinsic and Time Value

An option’s premium has two parts:

Intrinsic Value: The amount by which an option is “in the money.”

For a call option, it’s the difference between the current price and the strike price.

For a put option, it’s the difference between the strike price and the current price.

Time Value: Represents the potential for the option to gain more value before expiration. The longer the time to expiry, the higher the time value.

Example:
If a stock is trading at ₹1,200 and a call option with a strike price of ₹1,000 is priced at ₹220, then:

Intrinsic Value = ₹200 (₹1,200 - ₹1,000)

Time Value = ₹20 (₹220 - ₹200)