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Intrinsic and Time Value for Calls

Example 1.2  Where There is Intrinsic Value

 Call Intrinsic Value Stock price \$56.00 Call premium \$7.33 Exercise Price \$50 Time till expiration 2 months Intrinsic Value \$56 - \$50 = \$6.00

 Call Time Value Stock price \$56.00 Call premium \$7.33 Exercise Price \$50 Time till expiration 2 months 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–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 Stock price \$48.00 Call premium \$0.75 Exercise Price \$50 Time till expiration 2 months Intrinsic Value \$48 - \$50 = \$0.00

 Call Time Value Stock price \$48.00 Call premium \$0.75 Exercise Price \$50 Time till expiration 2 months Time Value \$0.75 - \$0.00 = \$0.75