7 Common Trading Terms and Definitions

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2. Out of the money, in the money, and at the money option

Option price comprises of time value and intrinsic price.

Time Value + Intrinsic Value = Option Price

Time value is the amount of money that the option worth due to the time the option has until its expiration date. Longer the time the option has until its expiration date, the higher the time value of this option. The time value of an option will become zero if the option has expired. Intrinsic value for the money call option is the difference between the current market security price and option strike price. Conversely, in the money put option’s intrinsic value is the difference between option strike price and current market security price. If the current security price is lower than the call option strike price, this option is an out of the money option. It only has a time value. A call option with a strike price that is lower than the current market security price is an in the money option. This option has time value and also intrinsic value. Near or at the money option is the option, which strikes price is close to the current market security price.

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