how options are valued at expiration
the expiration date affects the option s price or premium generally options with later expiration dates are more expensive because of the increased time value this gives the holder a longer period to benefit from favorable price movements in the underlying asset the value of an option is generally derived from its intrinsic value and time value the intrinsic value of an option is the present value of the derivative it is the difference between the option s strike or exercise price and the current market price for the underlying asset the intrinsic value is calculated for a call option by taking the underlying asset s current price and subtracting the strike price the intrinsic value of a put option is the strike price minus the underlying asset s current price if the result is negative the option s intrinsic value is zero the other component of an option s value is time value this represents the extra premium that traders and investors are willing to pay for the option based on its potential to make a profit before the option expires as the option approaches its expiration date the time value normally decreases a phenomenon known as time decay time value accounts for the risk or uncertainty associated with holding the option over a period the expiration time of an options contract is the date and time when it becomes void it is more specific than the expiration date and should not be confused with the last time to trade that option the value of an option at expiration is discussed in terms of its moneyness which is the relationship between the underlying asset s market price and the option s strike price three common terms used for the moneyness of options at expiration are in the money itm at the money atm and out of the money otm other names used for the value of options at expiration describe them as near the money is either slightly itm or otm and deep in the money is highly profitable while deep out of the money can only be exercised at a significant loss understanding these outcomes is essential for traders and investors to effectively manage their positions and expectations whether you re holding an itm option with intrinsic value or an otm option that is likely to expire worthless knowing what to expect can help you make better informed decisions as you navigate the complexities of options trading 