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What are "Intrinsic Value" and "Time Value"?

An option price comprises intrinsic value and time value.

Option price = intrinsic value + time value

Share price EUR 112
Exercise price EUR 100
Option premium EUR 20

EUR 20 = EUR 12 + EUR 8

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Share price EUR 112
Exercise price EUR 100
Intrinsic value EUR 12

Usually, the intrinsic value is the minimum option value.

The value of European-style options, which cannot be exercised immediately, may well fall below the intrinsic value due to interest rate effects.

The option's time value is that part of the option price which the buyer is willing to pay on top of the intrinsic value for the opportunity of benefiting from positive price changes in the underlying instrument during the remaining lifetime of the option. From the seller's point of view, the time value is of course a risk premium.

On top of this, the time value is affected by financing costs and returns (for example dividends on equity options).

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