Option Premiums

The SIE loves to feed you a strike, a market price, and a premium and ask for the time value: find intrinsic value first, then subtract it from the premium. The classic trap is letting intrinsic value go negative — an out-of-the-money option’s worth-if-exercised stops at zero, so its whole premium is time value. Watch for the “tell” that two otherwise identical options differ only in expiration or volatility; the answer hinges on the rule that more time and higher volatility both lift time value, the only moving part once intrinsic value is fixed.

Don’t confuse premium with the payoff math from the call and put pages: premium is what you pay or receive up front, while breakeven, max gain, and max loss come later. The long buyer’s max loss equals the premium, while the writer collects it as their maximum gain. A hook: time value is the option’s “hope value,” melting toward zero by the third-Friday expiration (some older prep banks still say the Saturday after — the OCC moved it to Friday in 2015).