Option value

The difference between the intrinsic value of an option and its actual value is called the option value. It is called option value because it is the additional value that comes from the option not to exercise if that is a more profitable course.

Option value can be a substantial part of the value of an option. It increases with:

• the volatility of the underlying
• the time till expiry
• the option moving towards being, or further into being, out-of-the-money.

It should be obvious that if an option is at-the-money or out-of-the-money, then it only has a positive value because of its option value.

Option value can existing in securities that are not options and in contracts or businesses.