Two building blocks: intrinsic value + time value
Every option price splits into exactly two parts. Intrinsic value is what the option would be worth if it expired right now. Example: you hold a call option with a strike price of €100, and the stock trades at €108. The option then has €8 of intrinsic value — that is what you could extract immediately. Time value is everything in the price above that. If the option costs €11, then €3 of it is time value.
Cashable right now. Depends only on the gap between price and strike.
The premium for the chance the price still moves. Fades to zero by expiration.
Why time works against the buyer
Time value is a kind of bet on the remaining time. The more time left until expiration, the more opportunity the price has to move your way — which is why time value is higher. With each passing day, that window shrinks and time value declines. This process is called time decay, and the metric for it is theta. The decay is not steady: in the final weeks before expiration it accelerates markedly. For option buyers this is a constant headwind; for option sellers, a tailwind.
This is why an option can lose value even when the stock barely moved: the fading time value eats the price. More on this in our Greeks guide (theta).
Volatility: the underrated price driver
The third big influence on an option’s price is the expected size of the move, known as implied volatility (IV). It describes how large a move in the underlying the market expects before expiration. The bigger the expected move, the more valuable the option — because a wilder-swinging stock has a higher chance of clearing the strike by a wide margin. The fascinating part: options can get more expensive or cheaper without the stock price moving at all. If expected volatility alone rises (say, before a key event like earnings), the premium rises with it.
This is where a classic beginner trap hides: you buy an expensive option before earnings, the stock moves as hoped — and you still lose money, because after the event volatility and thus the premium collapse (the infamous “IV crush”). How to tell high from low volatility is explained in our implied volatility guide.
Putting it together: the five ingredients
Professionals calculate the “fair” option price with models (the best known is Black-Scholes), but the idea behind it is simple. Five ingredients set the price: the current price of the underlying, the strike price, the time left, the interest-rate level, and the expected volatility. Change one of these ingredients and the price changes — and the Greeks are simply the metrics that measure how sensitively the price responds to each ingredient. Above all this, one principle still holds: trading ultimately happens in the order book, from supply and demand. The model gives the reference value, around which real buyers and sellers negotiate the actual price.
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Frequently asked questions
What is the difference between intrinsic value and time value?
Intrinsic value is the part of the option price you could cash in right now — the gap between the stock price and the strike price when it is in your favour. Time value is everything on top: the premium for the chance that the price could move further your way before expiration. At expiry, time value is zero and only intrinsic value remains.
Why does an option lose value over time?
Because time value erodes as expiration approaches (this is called time decay, or theta). Less time left means less opportunity for a favourable move — so the option is worth less. This decay speeds up in the final weeks before the expiration date.
What does implied volatility do to the price?
Implied volatility (IV) is the size of the move the market expects. The bigger the expected move, the more expensive the option — because a larger potential move raises the chance the option pays off. When IV rises, options get more expensive; when it falls, they get cheaper, even if the stock price does not move.
Aren’t option prices just supply and demand?
At their core, yes — options also trade from supply and demand in the order book. The difference is that their “fair” price can be calculated from several building blocks: stock price, strike price, time left, interest rates, and expected volatility. Supply and demand move the price around that calculated value.
How do I know if an option is expensive or cheap?
The best guide is implied volatility compared to its own history (tools like IV Rank help). When IV is high versus its past, options tend to be expensive — good for sellers. When it is low, they tend to be cheap — more interesting for buyers. Our IV guide explains this in detail.