As an example, let us say that trader A thinks that corn prices are going to move substantially higher in the near future, but at the same time, he wants to limit his risk in case he is wrong. One strategy that he could use would be to buy a call option. As the market moved up in trader A's favor, the seller of the option was making margin calls, sending money to his broker to ensure that he had enough money in his account to cover any losses that he might incur from his potential short position. There are two components of an option premium intrinsic value and time value. Intrinsic value is equal to the gross profit an option buyer could earn if the option was exercised.
Time value is equal to the option premium less the intrinsic value.
In general, time value decreases as the amount of time remaining until expiration decreases. For options with no intrinsic value, the entire premium equals the time value. Once a buyer establishes a position in the agricultural options market, he has three alternatives available. The buyer can let the option expire, exercise the option, or offset the option in the option market. Offsetting means canceling an option position by initiating an opposite transaction on the option trading exchange.