InvestorQ : How is intrinsic value different from time value of an option?
Maniish Lofar made post

How is intrinsic value different from time value of an option?

Answer
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Nisha Chandani answered.
2 years ago


When you see the option price of a particular strike on a stock, remember it comprises of two components; the intrinsic value and time value. An understanding of these 2 concepts is extremely important for any options trader. Let us go back to the RIL example. Assume that the call option of RIL 1650 strike is quoting on the NSE at Rs. 38. If the spot price of RIL is Rs.1660, then out of the premium of Rs.38, Rs. 10 will be intrinsic value of the option (1660-1650) while the balance of Rs.28 will be the time value of the option. If the stock price of RIL is less than the strike price then the entire premium will be time value.

The distinction between time value and intrinsic is crucial to your understanding of trading in options. Remember, an option is a wasting asset and therefore the time value of the option keeps reducing as the date of maturity approaches and almost comes close to zero by the time the maturity approaches. Hence as an option buyer it always makes more sense for you to buy options in the beginning of the contract as it will give you more time value and volatility prospects to play with.