Moneyness of Options -1 - To buy an option, an investor must pay an option premium. The option premium can be broken into Intrinsic Value and Time Value. The intrinsic value of an option represents the current value of the option.
Call Option Intrinsic Value = Price of Underlying Asset - Strike Price
Put options Intrinsic Value = Strike Price - Price of Underlying Asset
The time value of an option is an additional amount an investor is willing to pay over the current intrinsic value. It reduces as the expiry date approaches. Time value is calculated by taking the difference between the option’s premium and the intrinsic value.
Time Value = Option Premium - Intrinsic Value