Definition
Intrinsic Value vs Time Value
An option's premium splits into intrinsic value (the real in-the-money amount) and time value (everything else).
If Nifty is at 24,200 and you hold a 24,000 call, ₹200 of the premium is intrinsic value — the amount by which it is in-the-money. Anything above that ₹200 is time value, the market's price for the remaining possibility of further gains.
Out-of-the-money options have zero intrinsic value, so their entire premium is time value, which is why they decay to nothing if the move never comes. As NSE weekly expiry approaches, time value evaporates fastest, and on expiry afternoon an option is worth only its intrinsic value.
Related terms
- MoneynessMoneyness describes where an option's strike sits relative to the current price — in, at, or out of the money.
- Premium DecayPremium decay is the steady erosion of an option's time value as it approaches expiry, driven by theta.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.