# Option premiums: intrinsic value, time value and the break-even price

An option premium is its purchase price. In the standard introductory decomposition, intrinsic value is the favorable difference between underlying and strike, floored at zero; time or extrinsic value is the remaining premium. An out-of-the-money option can therefore have a positive price before expiry despite having no intrinsic value.

Evidence: [Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing); [What is an Option?](https://www.optionseducation.org/optionsoverview/what-is-an-option)

Canonical: https://degreesofsatoshi.com/encyclopedia/option-premium-intrinsic-time-value/
Published: 2026-10-02
Substantively modified: 2026-10-02
Independently verified by an automated reviewer: 2026-10-02T19:18:00.092Z
Data current through: 2026-10-02

AI-assisted research and drafting with a separate automated source-verification pass; no external expert or named human review is implied.

## Key facts

- **Call intrinsic:** For one unit, max(underlying price − strike, 0). ([Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing))
- **Put intrinsic:** For one unit, max(strike − underlying price, 0). ([Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing))
- **Extra premium:** Time value is premium above intrinsic value in this decomposition. ([Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing))

## 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.

Evidence: [Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing)

## 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.

Evidence: [Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing)

## 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.

Evidence: [Inverse Options](https://support.deribit.com/api/v2/help_center/en-us/articles/31424939096093.json); [Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing)

## Questions

### Does zero intrinsic value mean an option is free?

No. Before expiry, an out-of-the-money option may still command time value.

Evidence: [Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing)

## Claims and scope

### option-premium-intrinsic-time-value-quick-answer

An option premium is its purchase price. In the standard introductory decomposition, intrinsic value is the favorable difference between underlying and strike, floored at zero; time or extrinsic value is the remaining premium. An out-of-the-money option can therefore have a positive price before expiry despite having no intrinsic value.

Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null}

### option-premium-intrinsic-time-value-fact-call-intrinsic

Call intrinsic: For one unit, max(underlying price − strike, 0).

Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null}

### option-premium-intrinsic-time-value-fact-put-intrinsic

Put intrinsic: For one unit, max(strike − underlying price, 0).

Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null}

### option-premium-intrinsic-time-value-fact-extra-premium

Extra premium: Time value is premium above intrinsic value in this decomposition.

Scope: {"collection":"defi","dataAsOf":"2026-10-02","blockHeight":null}

## Sources

- [Options Pricing](https://www.optionseducation.org/optionsoverview/options-pricing) — Options Industry Council. Option price components and model inputs. Locator: Intrinsic value; Time value; Premium inputs. Retrieved: 2026-10-02T18:53:21.237Z.
- [What is an Option?](https://www.optionseducation.org/optionsoverview/what-is-an-option) — Options Industry Council. General option concepts; equity delivery conventions are not imported into crypto contracts. Locator: Calls; Puts; Premium. Retrieved: 2026-10-02T18:53:21.136Z.
- [Inverse Options](https://support.deribit.com/api/v2/help_center/en-us/articles/31424939096093.json) — Deribit. Official support article retrieved through its public Help Center API; inverse settlement specifications. Locator: Settlement process change; Settlement examples. Retrieved: 2026-10-02T18:53:21.588Z.

## Revision history

- 2026-10-02: First publication after primary-source research and separate automated verification.

## Cite this entry

Degrees 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/