Let's discuss the two key components that make up an options price: intrinsic value and time value. The premium, often referred to as time value, is a crucial factor in determining the overall price of an option. For instance, in an in the money call option with a strike of 65 and an underlying security of 67, the option price would be 3, comprising of 2 points of intrinsic value and 1 point of premium. On the other hand, an out of the money call with a strike of 65 and underlying security at 63 would have an option price of 1-1/2, with the entire amount being attributed to the premium as there is no intrinsic value. This understanding of the components of an options price is essential in making informed investment decisions.
