This is a very important aspect of options that traders need to understand. Let us understand this with the example of 3 different strike call options of the same stock for the same expiry. Let us assume that the stock price of Tata Steel is Rs.651. Let us look at the break-up in value of 3 different types of options of the same expiry…

Particulars

Rs.630 Call (ITM)

Rs.650 Call (ATM)

Rs.670 Call (OTM)

Option Price

Rs.29

Rs.10

Rs.4

Intrinsic Value

Rs.21

Rs.1

Rs.0

Time Value

Rs.8

Rs.9

Rs.4

As we can see in the above instance, the in-the-money (ITM) call has intrinsic value and time value while the OTM option has only time value.