Intrinsic Value vs Time Value

Every option premiumThe price paid to buy an option. splits into exactly two parts: **intrinsic valueWhat an asset is really worth, based on its fundamentals. (real, exercisable value right now) and time value* (everything else — the value of possibility* before expiry). Premium = intrinsic + time value. Learning to split them is the key that unlocks the rest of optionsThe right, not the obligation, to buy or sell at a set price..

• Intrinsic valueWhat an asset is really worth, based on its fundamentals. — how much the optionThe right, not the obligation, to buy or sell at a set price. is ITMWhere an option’s strike sits relative to the current price. right now (a ₹950 callThe right, not the obligation, to buy or sell at a set price. with the stock at ₹1,000 has ₹50 intrinsic). OTMWhere an option’s strike sits relative to the current price./ATM options have zero intrinsic valueWhat an asset is really worth, based on its fundamentals..
• Time value — the premium above intrinsic valueWhat an asset is really worth, based on its fundamentals.: the market’s price for the chance that the optionThe right, not the obligation, to buy or sell at a set price. moves further into profit before expiry. It’s pure “hope,” and it depends on time left and volatilityThe size of price swings — not their direction..