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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

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

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