Option Price and Value

Abstract

This chapter focuses on option prices, which may be broken down into two parts: intrinsic value and time value. Depending upon the specific circumstances, an option price may consist only of intrinsic value, it may consist only of time value or it may consist of both intrinsic and time value. Intrinsic value is the value of an option if it were exercised now. It is the difference between the option's strike price and the prevailing price of the underlying. In most cases, intrinsic value would only account for part of an option's price. The remainder of the option's price is the option's time value.