To understand time value you need to grasp ITM and OTM thoroughly. An ITM option has intrinsic value and time value. An OTM option only has time value. If the price of SBI is Rs.260 and the Rs.250 call option is trading at Rs.14, then Rs.10 (260-250) will be the intrinsic value and the balance of Rs.4 will be the time value. Of course, in case OTM call and put options, the entire premium will be time value. In the same breath, let us also look at when to buy call and put options and how the payoffs will pan out.

The decision to buy calls and puts will depend on your price outlook. For example, if you expect the stock price to go up, you can buy a call option and if you expect the price to go down then you can buy a put option. In both these cases, your risk is limited to the amount of premium paid but profits can be unlimited. When you buy calls and puts, the OTM option may appear to be cheap. But since it is fully time value, it also loses value as the option expiry approaches.

Mahima Royanswered.To understand time value you need to grasp ITM and OTM thoroughly. An ITM option has intrinsic value and time value. An OTM option only has time value. If the price of SBI is Rs.260 and the Rs.250 call option is trading at Rs.14, then Rs.10 (260-250) will be the intrinsic value and the balance of Rs.4 will be the time value. Of course, in case OTM call and put options, the entire premium will be time value. In the same breath, let us also look at when to buy call and put options and how the payoffs will pan out.

The decision to buy calls and puts will depend on your price outlook. For example, if you expect the stock price to go up, you can buy a call option and if you expect the price to go down then you can buy a put option. In both these cases, your risk is limited to the amount of premium paid but profits can be unlimited. When you buy calls and puts, the OTM option may appear to be cheap. But since it is fully time value, it also loses value as the option expiry approaches.