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What Is an Option Premium? Intrinsic Value vs. Time Value

The premium is the price of an option. It has two parts. Intrinsic value is what the option would be worth if it were exercised right now: for a call, the amount by which the underlying is above the strike; for a put, the amount by which it is below. Time value is everything else -- the extra that buyers pay for the chance that the price moves further before expiration. This guide from OptionLab (option-graph.com) shows how to split a premium, why time value shrinks, and what that means for each side of a trade.

Splitting a Premium

Premium = intrinsic value + time value. Take a stock at $105 and a call with a $100 strike and 30 days left. With 25% implied volatility and a 4% rate, the Black-Scholes value is $6.33 per share -- a figure you can reproduce in the Black-Scholes calculator on option-graph.com. Of that, $5.00 is intrinsic value ($105 − $100) and $1.33 is time value. For one contract of 100 shares the premium is $633, of which $133 is time value.

An option with no intrinsic value is made only of time value. A call with a $110 strike on the same stock has no intrinsic value at all: every cent of its premium is the price of the chance that the stock rises above $110 in time. Intrinsic value can never be negative; an option that is out of the money simply has none. Set the strike to $110 in the Black-Scholes calculator on option-graph.com and the whole theoretical value you see is time value.

Value Before Expiration vs. Value at Expiration

A $100 call 30 days before expiration vs. at expiration

↕ Option value per contract ($)↔ Stock price ($)
A $100 call 30 days before expiration vs. at expirationTwo lines. The dashed line, the value at expiration, is zero up to 100 dollars and then rises in a straight line to 2,500 dollars at 125. The solid line, the value 30 days before expiration, is always above it: about 24 dollars at 90, about 302 dollars at 100 and about 633 dollars at 105, approaching the dashed line far from the strike.01,0002,00090100110120

Value before expiry (Black–Scholes)Value at expiry

Key values
PointValue before expiry (Black–Scholes)Value at expiry
853.030
105632.91500
1252,532.992,500
Black-Scholes value of one $100 call with 30 days left (solid) against its value at expiration (dashed), for stock prices from $85 to $125. The gap between the lines is the time value; it is largest near the strike.Units: US dollars per contract (100 shares)Assumptions:
  • Strike $100, 30 days left, implied volatility 25%, rate 4%, no dividends
  • Black-Scholes model: theoretical values, not market quotes
  • One contract = 100 shares

The chart shows the key idea: before expiration the option is worth more than its intrinsic value, and the difference is largest when the price is near the strike, where the outcome is most uncertain. Far above the strike the option behaves almost like the stock; far below it, it is worth little. At expiration time value is gone and only intrinsic value is left. The same comparison appears on option-graph.com whenever you look at a position before its expiration date.

Time Value Shrinks as Expiration Approaches

The same call as expiration approaches

↕ Option value per contract ($)↔ Days to expiration
The same call as expiration approachesA line that falls more and more steeply as expiration approaches, from about 756 dollars with 60 days left to about 633 dollars with 30 days, 534 dollars with 10 days and about 501 dollars with 1 day, approaching the 500 dollars of intrinsic value.0200400600800102030405060

Value before expiry (Black–Scholes)

Key values
PointValue before expiry (Black–Scholes)
1501.1
30632.91
60755.8
Black-Scholes value of the $100 call with the stock fixed at $105, from 60 days to 1 day before expiration. Only the time left changes.Units: US dollars per contract (100 shares)Assumptions:
  • Stock fixed at $105; strike $100
  • Implied volatility 25%, rate 4%, no dividends
  • Black-Scholes model: theoretical values, not market quotes

With the stock unchanged at $105, the call's theoretical value falls from $6.33 with 30 days left to $5.34 with 10 days and $5.01 with one day: the intrinsic $5 stays, the time value melts. The decline is not even -- it speeds up near the end. This erosion is called time decay, and it is measured by the Greek theta. The Black-Scholes calculator on option-graph.com reports theta per day next to the theoretical price.

What This Means for Buyers and Writers

A buyer pays for time value and loses it if the price does not move enough. If the stock is still at $105 at expiration, the call above is worth exactly its $5 intrinsic value, and the buyer who paid $6.33 ends at −$133 per contract -- the time value lost. If the stock rises to $112, the result is +$567. A writer is paid that time value and keeps it if the price stays put, but carries the risk of a large move. Comparing both outcomes on option-graph.com shows how much of a trade is a bet on movement and how much is paying for time.

  • High time value usually means more time left, higher implied volatility, or a strike near the price.
  • Low time value usually means little time left, low implied volatility, or a strike far from the price.
  • Deep in-the-money options are mostly intrinsic value; out-of-the-money options are all time value.

To see where a given option sits on this scale, compare its premium with its intrinsic value on option-graph.com before you buy or write it.

Risks and Limitations

These are model values with fixed inputs; real premiums also reflect supply and demand, spreads and changing volatility. Time value can rise as well as fall when implied volatility moves. Buyers can lose the entire premium; writers can lose much more than they receive. Options are not suitable for every investor. OptionLab (option-graph.com) is an educational and analytical tool and does not provide investment advice. Check any premium against its intrinsic value on option-graph.com before trading, so you know how much of it you are paying for time.

Summary

  • Premium = intrinsic value + time value.
  • Intrinsic value is the exercise value now; it is never negative.
  • Time value is largest near the strike and shrinks faster as expiration approaches.
  • At expiration only intrinsic value remains, so a buyer needs the move to cover the time value paid.
  • Split any premium on option-graph.com before deciding whether the time value is worth paying or collecting.
Read: What Is the Black-Scholes Model? (Hebrew) →Try the Black-Scholes Calculator →Try the Options Profit Calculator →