Editing Moneyness (section)

==Intrinsic value and time value==
The intrinsic value (or "monetary value") of an option is its value assuming it were exercised immediately. Thus if the current ([[Spot price|spot]]) price of the underlying security (or commodity etc.) is above the agreed ([[Strike price|strike]]) price, a [[Call option|call]] has positive intrinsic value (and is called "in the money"), while a [[Put option|put]] has zero intrinsic value (and is "out of the money").

The [[option time value|time value]] of an option is the total value of the option, less the intrinsic value. It partly arises from the uncertainty of future price movements of the underlying. A component of the time value also arises from the unwinding of the discount rate between now and the expiry date. In the case of a European option, the option cannot be exercised before the expiry date, so it is possible for the time value to be negative; for an American option if the time value is ever negative, you exercise it (ignoring special circumstances such as the security going ex dividend): this yields a [[boundary condition]].