Intrinsic value is the real, tangible value an option would have if exercised right now. A $100 call on a stock trading at $112 has $12 of intrinsic value. Time value (also called extrinsic value) is the additional amount you pay above intrinsic value for the possibility that the option could become more profitable before expiration. If that $100 call costs $15, then $12 is intrinsic and $3 is time value.

The Formula

Option Premium = Intrinsic Value + Time Value

For calls: Intrinsic Value = Stock Price − Strike Price (if positive; otherwise 0)

For puts: Intrinsic Value = Strike Price − Stock Price (if positive; otherwise 0)

Time Value = Premium − Intrinsic Value (always ≥ 0)

Real Examples

NVDA at $130:

| Option | Premium | Intrinsic Value | Time Value | $120 call (ITM)$15.50$10.00$5.50 $130 call (ATM)$6.80$0.00$6.80 $140 call (OTM)$2.30$0.00$2.30 $140 put (ITM)$14.20$10.00$4.20 $130 put (ATM)$6.50$0.00$6.50 | $120 put (OTM) | $1.80 | $0.00 | $1.80 |

Notice: OTM options are 100% time value. ATM options have the highest time value in dollar terms. Deep ITM options have the most intrinsic value and least time value.

Why Time Value Exists

Time value represents uncertainty. Even if a call is currently OTM, the stock might rally past the strike before expiration. Buyers pay for this possibility. More time = more uncertainty = more time value. More volatility = more uncertainty = more time value.

Three factors drive time value:

1. Time remaining. A 60-day ATM option has roughly 40% more time value than a 30-day ATM option. Time value decays in a square-root pattern — losing the last 30 days of value is much faster than the first 30 days.

2. Implied volatility. Higher IV inflates time value. A stock with 50% IV will have option premiums roughly double those of a stock with 25% IV (at the same strike, expiration, and stock price).

3. Proximity to the strike. ATM options have the most time value because there's maximum uncertainty about whether they'll end up in or out of the money. Deep ITM and far OTM options have progressively less time value.

Why This Matters for Your Strategy

If you're buying options: You're paying for both intrinsic and time value. The time value portion erodes every day (theta decay) — it's a guaranteed cost. For your trade to profit, the stock must move enough to overcome this decay.

If you're selling options: You're collecting time value as income. Every day that passes without a big stock move means the option loses time value, which is money flowing from the buyer's pocket to yours. This is the mathematical edge behind covered calls and cash-secured puts.

Intrinsic Value at Expiration

At expiration, time value is zero. The option is worth exactly its intrinsic value — nothing more.

This is why OTM options expire worthless (zero intrinsic value, zero time value remaining). And it's why the final week before expiration sees such rapid price changes in near-the-money options — the time value is evaporating fast.

Practical Application

When comparing options for a covered call strategy, OptionsPilot's screener focuses on the time value component of the premium, because that's the "income" portion. Intrinsic value isn't really income — it's just embedded stock value. A covered call's return comes from the time value collected, minus any intrinsic value given up if assigned.

Quick rule of thumb: Look at the extrinsic value as a percentage of the stock price. A $200 stock with a covered call generating $4 in extrinsic value gives you a 2% monthly return (24% annualized). That's how income sellers evaluate premium.