Moneyness, intrinsic value and time value

7 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

A call is in the money (ITM) when the share price is above the strike, at the money (ATM) when they are equal, and out of the money (OTM) when below. Puts are the reverse.

An option's premium has two parts. Intrinsic value is what it would be worth if exercised now: for a call, max(0, price - strike). Time value is everything else: the chance the option becomes more valuable before expiry. OTM options are pure time value.

Time value decays as expiry approaches, faster in the final weeks. This decay (theta) works for sellers and against buyers. Higher expected volatility increases time value because big moves become more likely.

Formula

Call intrinsic = max(0, S - K)
Put intrinsic = max(0, K - S)
Time value = Premium - Intrinsic

Key takeaways

ITM / ATM / OTM describe strike versus price.
Premium = intrinsic value + time value.
Time value decays faster near expiry.

Check your understanding

1. Share $52, call strike $50, premium $3.50. Intrinsic and time value?

$2 and $1.50
$3.50 and $0
$0 and $3.50
$1.50 and $2

Show the answer

$2 and $1.50. Intrinsic = 52 - 50 = $2; time value = 3.50 - 2 = $1.50.

2. An out-of-the-money option's premium is...

All intrinsic value
All time value
Zero
Equal to the strike

Show the answer

All time value. OTM options have no intrinsic value.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.