A must-read for newbie options traders: Intrinsic Value vs Time Value, understand how to price it in one article.

The price of options consists of two parts—Intrinsic Value and Time Value. Understanding these two concepts can help you quickly determine whether an option is cheap or expensive, avoiding unnecessary expenses.

Intrinsic Value: How much is the Options worth now?

In simple terms, Intrinsic Value is how much you can earn by exercising the Options immediately.

For a call option: If the current price is $60 and the strike price is $50, you can buy at $50 and sell at $60, making a profit of $10—the $10 is the intrinsic value.

For put options: Conversely. Current price is $45, strike price is $50, you can sell at $50 and then buy at $45, earning $5.

The calculation formula is very simple:

• Call Options: Intrinsic Value = Current Price - Exercise Price
• Put Options: Intrinsic Value = Strike Price - Current Price

If the result is a negative number? Then it's 0, because no one would lose money exercising Options.

In-the-money options (Intrinsic Value) are much more expensive than out-of-the-money options (zero intrinsic value) because one can make a profit right now, while the other only has the hope of gambling.

Time Value: Why is it so expensive when it hasn't expired yet?

Time Value = Total Option Price - Intrinsic Value

This is what you pay for “possibility”. For example, if the total price of an option is $8 and the intrinsic value is only $5, then $3 is the time value.

Time value is influenced by three main factors:

1. How much time is left until expiration → The longer the time, the greater the opportunity to become profitable, and the higher the time value.
2. Implied Volatility → The more unstable the market, the greater the possibility of significant fluctuations in asset prices, and the more expensive the time value (this is why options are ridiculously expensive before major events).
3. Interest Rates and Dividends → Have some impact, but not a major factor

Core Principle: As the expiration date approaches, the time value decays rapidly (known as “time decay”). Therefore, experienced players sell options when the time value is still high, rather than waiting foolishly until expiration.

Practical Applications: How to Use These Two Values?

Risk Assessment → Look at whether the Intrinsic Value is high or not. The greater the Intrinsic Value, the more this option is “in the money,” and the risk is relatively small; options with an Intrinsic Value of zero rely entirely on speculation, which carries a high risk.

Timing Trading → Look at whether the time value is fat or not. The time value is very high at the beginning and quickly depreciates as the expiration date approaches. If you are right about the direction, selling the options in hand (capturing high value) is more rewarding than waiting until expiration (when only intrinsic value remains).

Strategy Selection → Need high leverage? Buy out-of-the-money Options (cheap, all time value is a bet). Want to be more conservative? Buy in-the-money Options or sell Options (profit from time decay).

Simple Judgment: Intrinsic Value represents the “substance” of the present, while Time Value represents the “possibility” of the future. Options with both high values are expensive, indicating that the market is optimistic about the future; options that only have high intrinsic value usually indicate a price increase.