The call price is made up of intrinsic value and time value, which equates to the total price. Understanding this requires a little bit of an understanding of options and how they work.

Intrinsic Value

The intrinsic value is the price of the market minus the exercise price. The exercise price for a call option is the option holders' right to buy at a specified price. Therefore, when the market goes higher the option holder can reap a profit. If the market goes lower than the specified price the option is rendered worthless. Intrinsic value is the actual profit the option holder receives as the option is exercised. Keep in mind, intrinsic value can not be negative, only zero or a positive value.

Time Value

Because options are time sensitive investments they hold a value for their time left until expiration. Time value of options is simply the amount of excess profit the option holder reaps for the time left until expiration. This time value profit to the option holder is above and beyond the intrinsic value, and is always a notional amount. Note, by offsetting the option as opposed to exercising gives the option holder a greater profit because of the time value profit.

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