Options & derivatives
Premium
The price paid for an option, made up of intrinsic value plus time value.
How it works
Intrinsic value is what the option would be worth if exercised now. Time value is everything else — the chance it becomes more valuable before expiry.
Time value decays towards zero as expiry approaches, which is why buying options is a race against the clock.
Formula
Premium = intrinsic value + time valueRelated terms
- OptionA contract giving the right, but not the obligation, to buy or sell something at a set price by a set date.
- ThetaHow much value an option loses each day simply because time passes.
- Intrinsic value (options)What an option would be worth if it were exercised immediately.
- Implied volatilityThe volatility the market is pricing into an option, derived from its premium.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.