Option time value
In finance, the value of an option consists of two components, its intrinsic value and its time value. Time value is simply the difference between option value and intrinsic value. Time value is also known as theta, or extrinsic value. Intrinsic value is the difference between the exercise price of the option (strike price, K) and the current value of the underlying instrument (spot price, S). If the option does not have positive monetary value, it is referred to as out-the-money. If an option is out-the-money at expiration, its holder will simply “abandon the option” and it will expire worthless. Because the option owner will never choose to lose money by exercising, an option will never have a value less than zero. On the graph at below, the call option’s intrinsic value begins when the underlying asset’s spot price exceeds the option’s strike price. Option value (i.e. price) is found via a formula such as Black-Scholes or using a numerical method such as the Binomial model.
