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This chapter is from the book

Intrinsic and Time Value for Calls

Example 1.2. Where there is intrinsic value

Call intrinsic value

Call time value

Stock price

$56.00

Stock price

$56.00

Call premium

7.33

Call premium

7.33

Strike price

50

Strike price

50

Time to expiration

2 months

Time to expiration

2 months

Intrinsic value

56 – 50 = 6.00

Time 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 – strike 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

$48.00

Stock price

$48.00

Call premium

0.75

Call premium

0.75

Strike price

50

Strike price

50

Time to expiration

2 months

Time to expiration

2 months

Intrinsic value

48 – 50 = 0.00

Time value

0.75 – 0.00 = 0.75

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