SIE (Training Consultants v3.5, 2025): Ch. 3 Equity Options, Sec. 9 – Option Intrinsic and Time Value

Terms & Definitions

In-the-Money (ITM) Call

Market price of stock > exercise price. Example: ABC @ 84, Call strike 80.

In-the-Money (ITM) Put

Market price of stock < exercise price. Example: ABC @ 35, Put strike 40.

At-the-Money (ATM) Option

Market price of stock = exercise price. Example: ABC @ 50, Call strike 50.

Out-of-the-Money (OTM) Call

Market price of stock < exercise price. Example: ABC @ 40, Call strike 45.

Out-of-the-Money (OTM) Put

Market price of stock > exercise price. Example: ABC @ 62, Put strike 60.

Intrinsic Value

In-the-money portion of the option; amount by which an option is ITM.

Time Value

Premium minus intrinsic value; represents extra value for time remaining until expiration.

Wasting Asset

Options are “wasting assets” because time value declines as expiration approaches.

Premium

Price of an option; directly related to intrinsic value and affected by multiple factors.

Factors Affecting Premiums

Market price of stock, time until expiration, volatility, interest rates, liquidity.

When is a call option in-the-money?

When the market price > exercise price.

When is a put option in-the-money?

When the market price < exercise price.

When is an option at-the-money?

When market price = exercise price.

When is a call option out-of-the-money?

When market price < exercise price.

When is a put option out-of-the-money?

When market price > exercise price.

What is the intrinsic value of an option?

The in-the-money amount of the option.

What is the time value of an option?

Premium minus intrinsic value.

Why are options called “wasting assets”?

Because time value declines as expiration approaches.

How does intrinsic value affect the premium?

More ITM → higher premium; premium moves dollar-for-dollar with stock price when ITM.

What factors influence option premiums?

Stock price, time to expiration, volatility, interest rates, liquidity. #