InvestorQ : Can you explain intrinsic value and time value in options?
sara Kunju made post

Can you explain intrinsic value and time value in options?

Answer
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2 years ago


While trading in options there are two basic things you need to understand. Firstly, you must understand the concept of time value and intrinsic value of an option. Secondly, you need to understand the key factors that influence options price. Any option price has 2 components viz. intrinsic value and time value. If Infosys is currently quoting at Rs.1020 and if the Infosys 1000 call options are available at Rs.50 then Rs.20 (1020-1000) will be the intrinsic value of the option and the balance of Rs.30 (50-20) will be the time value. But if an Infosys 1050 options is quoting at Rs.Rs.18 then the entire option price is time value as an out-of-the-money (OTM) option cannot have any intrinsic value. The reverse logic will apply in case of put options. That is because put options are a right to sell as against a call option which is a right to buy.