Encyclopedia DeFi · Entry 347
Option premiums: intrinsic value, time value and the break-even price
In this article
At a glance
Key facts
| Fact | Detail | Source |
|---|---|---|
| Call intrinsic | For one unit, max(underlying price − strike, 0). | [1] |
| Put intrinsic | For one unit, max(strike − underlying price, 0). | [1] |
| Extra premium | Time value is premium above intrinsic value in this decomposition. | [1] |
Account for both components
A hypothetical call with underlying at 108, strike 100 and premium 13 has 8 of intrinsic value and 5 of time value per unit. Paying 13 does not give the buyer an immediate profit of 8: the buyer paid for both components.
An otherwise comparable out-of-the-money call can still trade for a positive premium because future outcomes remain uncertain.
Time value responds to more than the clock
Remaining time and implied volatility affect the extra premium, alongside the other pricing inputs. Time decay is not a promise that the entire option price falls each day: an underlying move or volatility change can outweigh it.
Apply the decomposition in compatible units
Contract multipliers, exercise restrictions and settlement conventions complicate a screen-level comparison. Deribit inverse option premiums are quoted in the base currency while strikes are in dollars. Convert consistently before comparing a dollar intrinsic value with a coin-denominated premium. The introductory arithmetic is not a universal pricing model or immediate exercise opportunity.
Direct answers
Questions people ask
Does zero intrinsic value mean an option is free?
No. Before expiry, an out-of-the-money option may still command time value.
Inspect the evidence
The answer and key facts have stable claim links. These records retain the scope and qualification when reused.
Revision history
- — First publication after primary-source research and separate automated verification.
Source register
Sources and references
Retrieval dates and locators are recorded individually.- Options PricingOptions Industry Council
Option price components and model inputs.
Locator: Intrinsic value; Time value; Premium inputs · Version / scope: Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded · Retrieved: 2026-10-02T18:53:21.237ZOpen source - What is an Option?Options Industry Council
General option concepts; equity delivery conventions are not imported into crypto contracts.
Locator: Calls; Puts; Premium · Version / scope: Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded · Retrieved: 2026-10-02T18:53:21.136ZOpen source - Inverse OptionsDeribit
Official support article retrieved through its public Help Center API; inverse settlement specifications.
Locator: Settlement process change; Settlement examples · Version / scope: Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded · Retrieved: 2026-10-02T18:53:21.588ZOpen source
Research and drafting use AI assistance. A separate automated review checks claims against primary sources; no external expert or named human review is implied. Publication, substantive editing, source retrieval and verification are recorded separately. This version was independently checked by an automated reviewer on 2 October 2026.
Editorial method and correctionsDegrees of Satoshi editorial project. “Option premiums: intrinsic value, time value and the break-even price.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/option-premium-intrinsic-time-value/