Types of Derivatives-Cont’d Options-Cont’d Components of the Option Price The theoretical price of an option is made up of two components intrinsic value premium over intrinsic value. The intrinsic valueis the option’s economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, the intrinsic value is zero. Fora call option, the intrinsic value is the difference between the current market price of the underlying and the strike price. If that difference is positive, then the intrinsic value equals that difference if the difference is zero or negative, then the intrinsic value is equal to zero. Where the intrinsic value is zero, the option is said to be at-the-money. If the intrinsic value is positive, the option is in-the-money. If exercising an option would produce a loss, it is out-of-the-money. For a put option, the intrinsic value is equal to the amount by which the underlying’s market price is below the strike price.
