# Premium, intrinsic and extrinsic value, moneyness (Options 101, lesson 3 of 10) Canonical URL: https://mrkts.gg/learn/options/premium-and-moneyness Last updated: Nov 9, 2026, 9:00 AM ET > Split any option's premium into intrinsic and extrinsic value, tell ITM from OTM for calls and puts, and see what strike choice trades off. What you'll be able to do: Split premium into intrinsic + extrinsic, classify ITM/ATM/OTM for calls and puts, and explain the trade-offs of strike choice. ## Every price has two parts A tiny option chain for a $50 stock, 30 days to expiration, IV 30%. Call and put prices per share. The at-the-money row is highlighted. | Strike | Call | Put | | --- | --- | --- | | 45 | 5.22 | 0.22 | | 50 | 1.72 | 1.72 | | 55 | 0.30 | 5.30 | 1. The 45 call costs 5.22 with the stock at 50. 2. If you exercised right now, you'd gain 50 − 45 = 5.00. That's the intrinsic value. 3. The other 0.22 is extrinsic value: what people pay for time and for the chance of a bigger move. > **Key idea:** Premium = intrinsic value + extrinsic value. ## Intrinsic value Intrinsic value is how far an option is in the money. It can't be negative, because you'd never exercise a right that loses money. - Call: max(0, stock − strike). A 70 call with the stock at 80 has 10.00. - Put: max(0, strike − stock). An 85 put with the stock at 80 has 5.00. - A 90 call with the stock at 80 has 0. You wouldn't buy at 90 what sells for 80. ## Extrinsic value Extrinsic value pays for two things: time left, and how much the stock might move. It's biggest at the money, where the outcome is least certain. It shrinks to zero by expiration. *Chart (Extrinsic value (per share) against Stock price, priced with Black-Scholes):* Extrinsic value of the 50 call as the stock moves, with 30 days to expiration and IV 30%. It peaks when the stock is at the strike, at the money, and fades on both sides. > **Key idea:** The 55 call has no intrinsic value, yet it costs 0.30. That's all extrinsic: the chance the stock gets above 55 in time. ## In, at and out of the money | Call | Put | | --- | --- | | In the money: stock above the strike | In the money: stock below the strike | | At the money: stock near the strike | At the money: stock near the strike | | Out of the money: stock below the strike | Out of the money: stock above the strike | With the stock at 50, the 45 call is in the money by 5.00 and the 45 put is out of the money. Out-of-the-money options have no intrinsic value at all. > **Watch out:** Common mistake: mixing up puts. A put is a right to sell, so it gains value when the stock is below the strike. ## Choosing a strike is a trade-off | 45 call, in the money (5.22) | 55 call, out of the money (0.30) | | --- | --- | | Costs $522 per contract | Costs $30 per contract | | Breakeven: 50.22 | Breakeven: 55.30 | | Stock stays at 50: −$22 | Stock stays at 50: −$30 | | Stock reaches 60: +$978 | Stock reaches 60: +$470 | | Moves almost dollar for dollar with the stock | Needs a big move to pay off | > **Watch out:** Cheaper isn't a better deal. It's cheaper because it's less likely to pay off. ## Worked example: Five options on a $50 stock, 30 days out *Illustrative numbers, not real quotes.* Stock at $50. Split each price into intrinsic and extrinsic value: | Option | Price | Moneyness | Intrinsic | Extrinsic | | --- | --- | --- | --- | --- | | 45 call | 5.22 | ITM | 5.00 | 0.22 | | 50 call | 1.72 | ATM | 0 | 1.72 | | 55 call | 0.30 | OTM | 0 | 0.30 | | 45 put | 0.22 | OTM | 0 | 0.22 | | 55 put | 5.30 | ITM | 5.00 | 0.30 | - The 45 call: stock 50 − strike 45 = 5.00 intrinsic. The other 0.22 is extrinsic. - The 55 put: strike 55 − stock 50 = 5.00 intrinsic. The other 0.30 is extrinsic. - The ATM 50 call has no intrinsic value, yet carries the most extrinsic value, 1.72. Now the trade-off. Here is each call's P&L per contract at expiration: | Stock at expiration | 45 call (5.22) | 50 call (1.72) | 55 call (0.30) | | --- | --- | --- | --- | | 50 | −$22 | −$172 | −$30 | | 55 | +$478 | +$328 | −$30 | | 60 | +$978 | +$828 | +$470 | - The cheap 55 call loses only $30 when the stock sits still, but it needs the stock past 55.30 to profit. - The 45 call loses only $22 if the stock stays at 50, because 5.00 of its 5.22 price is intrinsic value that is still there at expiration. ## Practice The page has 7 practice questions and 5 mastery checks for this lesson, with feedback on each wrong answer: https://mrkts.gg/learn/options/premium-and-moneyness Next lesson: [Expiration and time decay](https://mrkts.gg/learn/options/time-decay.md) Education only, not investment advice. Example numbers are illustrative, not real quotes. --- Get the Desk's daily market feature by email: https://mrkts.gg/newsletter?ref=ai&src=learn-premium-and-moneyness AI-assisted commentary. Not investment advice.