Intrinsic Value Meaning: What an Option Is Worth Now

How the two parts work

• Intrinsic value depends only on the strike and the current price. It does not change with time or volatility.
• Time value depends on time to expiry, implied volatility and how close the strike is to the current price. It is highest at the money and falls to zero by expiry.
• Out-of-the-money options have no intrinsic value. Their whole price is time value.
• In-the-money options have both, and deep in-the-money options are almost all intrinsic value.

A worked example on Nifty

Nifty is at 25,000 with 12 days to expiry and implied volatility of 14%.

The 24,800 call is in the money by 200 points. If it were exercised now it would be worth ₹200, so ₹200 of its ₹398.30 price is intrinsic value and the other ₹198.30 is time value. On one lot of 65, the buyer pays ₹25,889.50, of which ₹12,889.50 is time value that will be gone by expiry unless Nifty rises further.

How time value decays

Only time value decays. Here is the 24,800 call as expiry approaches, with Nifty unchanged at 25,000:

The decay is slow at first and fastest in the last days. The rate of decay per day is theta.

Why time value is highest at the money

The market pays time value for uncertainty about whether the option will finish in the money. At the money, that is close to a coin toss, so the uncertainty is greatest and the time value highest: ₹280.50 on the 25,000 call against ₹117.65 on the 24,500 call and ₹92.10 on the 25,500 call. Deep in-the-money options are almost sure to stay in the money, and far out-of-the-money options are almost sure not to, so both carry little time value.

Intrinsic value at expiry

At expiry, time value is zero and an option settles at its intrinsic value. If Nifty closes at 25,150, the 25,000 call settles at ₹150 a unit, or ₹9,750 a lot, and the 25,200 call expires worthless. Index options are settled in cash at the index's closing value. Stock options that finish in the money are settled by delivery of shares. The buyer of an in-the-money index option that is exercised pays STT at 0.15% of its intrinsic value: ₹14.63 on the ₹9,750 above.

Why the split matters for a trade

• For buyers. Time value is the cost of the trade. A buyer of the 25,000 call needs Nifty above 25,280.50 at expiry just to recover the ₹280.50 of time value paid.
• For sellers. Time value is the income. A seller of the same call keeps up to ₹280.50 a unit if Nifty stays at or below 25,000.
• Choosing strikes. In-the-money strikes carry less time value as a share of their price, so they lose less to decay; out-of-the-money strikes are all time value.
• Spotting mispricing. An option should never trade below its intrinsic value for long. If a 24,800 call is offered at ₹190 with Nifty at 25,000, buying it and selling Nifty futures against it locks in at least ₹10 a unit by expiry.

When intrinsic value matters most

• Expiry day, when every option converges to its intrinsic value.
• Deciding whether to sell before expiry or hold. Selling captures any time value left; holding to expiry leaves only the intrinsic value.
• Stock options, where intrinsic value at expiry becomes a delivery of shares.
• Reading a chain, where the split shows how much of a price is certain and how much is hope.

Related terms

• ITM ATM OTM meaning: which options have intrinsic value
• Theta meaning: the daily decay of time value
• Premium meaning: the full price of an option
• Strike price meaning: the price the intrinsic value is measured against

Learn more

• Options trading: calls, puts and how their prices are built
• Option greeks: how time and volatility move the time value
• Option chain: reading price, intrinsic value and time value across strikes

Frequently asked questions