Divergence Secrets

Option Premium and Its Components

The premium (price of an option) is determined by several factors. It consists of:

Intrinsic Value (IV): The real value if the option were exercised immediately.

For a call: IV = Spot Price – Strike Price (if positive).

For a put: IV = Strike Price – Spot Price (if positive).

Time Value (TV): The extra premium paid for the time left until expiry, reflecting the potential for price movement.

So,
Option Premium = Intrinsic Value + Time Value.

As the option nears expiry, the time value decays—a phenomenon known as time decay or Theta decay.