The option premium consists of intrinsic value and time value. Consider a hypothetical example in which the price of the underlying asset is 10,000 yen and a call option (call) with a strike price of 9,500 yen has a premium of 700 yen. It breaks down as follows.
| Component | Calculation | Amount (yen) |
|---|---|---|
| Intrinsic value | 10,000 − 9,500 | 500 |
| Time value | 700 − 500 | 200 |
The premium rises and falls with changes in the price of the underlying asset, volatility (how much the price moves), and the time to expiry.