Options trading essentials: How to play with Intrinsic Value and Time Value?

The core of options pricing is based on two concepts: Intrinsic Value (the profit from immediate exercise) and Extrinsic Value (the premium from time + Volatility).

Quick Judgment

Intrinsic Value = Profit Space

• Call (Options): Intrinsic Value = Current Price - Strike Price (the higher the current price, the more valuable it is)
• Put: Intrinsic Value = Strike Price - Current Price (the lower the current price, the more valuable it is)

Example: Stock $60, Call strike price $50 → Intrinsic Value = $10 (can earn now)

Extrinsic Value = Cost of Betting on the Future

• Calculation method: Options total price - Intrinsic Value
• The longer the remaining time, the higher the volatility, the more expensive the extrinsic value.
• Approaching expiration date? Time decay accelerates, and extrinsic value rapidly evaporates.

Why is it important to distinguish?

Risk Assessment: Intrinsic Value often represents strong certainty; Extrinsic Value often represents high risk, and one must bet on the correct direction.

Timing of Trading: Sell when the extrinsic value is high (due to time decay); when approaching expiration, more precise directional judgment is needed.

Strategy Selection: Holding options with high extrinsic value carries significant risk and requires volatility to be profitable.

Core Logic

Options price = Intrinsic Value (existing profit) + Extrinsic Value (cost of the bet). Understanding this breakdown is essential to see the true cost-performance ratio of options and avoid paying for unnecessary time value.