Terminology of Option Premiums Option premiums have two components- intrinsic value and time value. Intrinsic value is the built-in value of an option. It is the difference between the option strike price and the underlying futures price. Intrinsic value is never quoted as less than zero. Time value is equal to the option premium less intrinsic value.
Time value reflects the risk that the option seller bears in selling the option to the buyer.
For options with no intrinsic value, the entire premium equals time value. For a call, it is the amount by which the futures price is above the strike price. For a put, it is the amount by which the futures price is below the strike price. At expiration an option's premium consists only of intrinsic value because the option no longer has any time value. The relationship between the underlying futures price and the option strike price is one factor affecting the value of premiums.