Moneyness, Intrinsic Value and Time Value
Moneyness describes the relationship between the strike price and the spot price. ITM (In-The-Money) — exercise today yields profit. ATM (At-The-Money) — strike...
Moneyness + Premium Decomposition
Moneyness describes the relationship between the strike price and the spot price. ITM (In-The-Money) — exercise today yields profit. ATM (At-The-Money) — strike ≈ spot. OTM (Out-Of-The-Money) — exercise today yields loss. Option premium = Intrinsic Value (profit if exercised now) + Time Value (what remains for the uncertainty until expiry).
For a CALL: ITM when Spot > Strike; ATM when Spot ≈ Strike; OTM when Spot < Strike. For a PUT the signs flip: ITM when Spot < Strike, OTM when Spot > Strike. Intrinsic Value (IV) can never be negative — an option will simply be allowed to expire worthless if IV would be negative. Time Value (TV) is the part of the premium that reflects the probability of the option moving deeper ITM before expiry. TV decays to zero at expiry (theta decay). ATM options have the highest time value because their moneyness is most uncertain.
Has intrinsic cash value today
At the strike — next tick decides ITM or OTM
Cheap — only pays if price moves a lot
Every day, Time Value shrinks — accelerating as expiry nears
A Practical Example
| Strike | Call IV | Call TV | Call Total | Put IV | Put TV | Put Total | Moneyness |
|---|---|---|---|---|---|---|---|
| 22,300 | 200 | 80 | 280 | 0 | 60 | 60 | Call ITM / Put OTM |
| 22,500 | 0 | 150 | 150 | 0 | 140 | 140 | Both ATM |
| 22,800 | 0 | 40 | 40 | 300 | 85 | 385 | Call OTM / Put ITM |
What Makes This Important
Intrinsic / Time Value Formula
Call IV = max(0, S − K) Put IV = max(0, K − S) Time Value = Premium − Intrinsic Value
Frequently Asked Questions
ATM is the "maximum uncertainty" strike — a tiny move in either direction flips ITM/OTM. Market makers price maximum optionality exactly at ATM, which maps to highest time value.
🧠 Quick Quiz
2 questions to check your understanding