Intrinsic and Time Value for Calls

Example 1.2. Where There is Intrinsic Value
Call Intrinsic Value Call Time Value 
Stock price$56.00Stock price$56.00
Call premium$7.33Call premium$7.33
Exercise price$50Exercise price$50
Time till expiration2 monthsTime till expiration2 months
    
Intrinsic Value$56 - $50 = $6.00Time Value$7.33 - $6.00 = $1.33

Notice how: (Intrinsic Value + Time Value) = the option price

Formulas for Intrinsic and Time Values for calls:

  • Call Intrinsic Value = stock price–exercise price

  • Call Time Value = call premium–call Intrinsic Value

The minimum Intrinsic Value is zero.

Example 1.3. Where There is no Intrinsic Value
Call Intrinsic Value Call Time Value 
Stock price$48.00Stock price$48.00
Call premium$0.75Call premium$0.75
Exercise ...

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