1. What Are Option Premium Components?

The option premium consists of two components: intrinsic value and time value. The intrinsic value is the immediate value if the option were exercised, while the time value represents the potential for additional profit before expiration.

2. How Does the Calculator Work?

The calculator uses the basic options formula:

Where:

• Premium — Total price paid for the option
• Intrinsic Value — Difference between underlying asset price and strike price
• Time Value — Additional value based on time remaining until expiration

Explanation: The calculator allows you to input any two values to calculate the third component of the equation.

3. Importance of Understanding Premium Components

Details: Understanding these components helps traders evaluate whether an option is fairly priced and how its value might change over time.

4. Using the Calculator

Tips: Enter any two known values (premium, intrinsic value, or time value) in USD to calculate the third component. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is intrinsic value for call options?
A: For calls, intrinsic value = current price - strike price (if positive, otherwise zero).

Q2: What is intrinsic value for put options?
A: For puts, intrinsic value = strike price - current price (if positive, otherwise zero).

Q3: What factors affect time value?
A: Time until expiration, volatility, interest rates, and distance from strike price.

Q4: How does time value change as expiration approaches?
A: Time value decays, especially rapidly in the final weeks before expiration.

Q5: Can an option have value if it's out of the money?
A: Yes, through time value alone, though this diminishes as expiration nears.