Updated for the 2026-2027 CFA® Level I curriculum.
An option's value has two parts: what it would pay off right now and what it might pay off later. Exercise value captures the first part. Time value captures the second. Moneyness tells you which side of the strike price the underlying sits on. Together these three ideas explain why an option premium is almost never equal to its payoff, and CFA Level I tests this relationship directly. After this note, you should be able to calculate exercise value for a call and a put, classify an option's moneyness, and back out time value from a quoted price.
Quick Answer
The time value of an option is the option's price minus its exercise value. Exercise value is what the holder receives by exercising immediately: for a call and for a put. Time value reflects the chance the option becomes more profitable before expiration. It shrinks as expiration approaches and equals zero at expiration, when the option is worth only its exercise value.
Key Takeaways About Option Exercise Value, Moneyness, and Time Value
Option value equals exercise value plus time value.
Exercise value for a call is . Exercise value for a put is .
Exercise value can never be negative. The holder simply lets the option expire unused.
Moneyness compares the underlying price to the strike price and has three states: in the money, at the money, out of the money.
Time value is highest when the option has more time remaining and uncertainty about the underlying's future price.
Time value equals zero at expiration. Only exercise value remains.
"Strike price" and "exercise price" mean the same thing. The CFA curriculum uses them interchangeably.
What You Need to Know for CFA Level I
Calculate exercise value for both calls and puts given and .
Classify any option as in the money, at the money, or out of the money.
Explain why exercise value is bounded at zero, never negative.
Decompose a quoted option price into exercise value and time value.
Explain why time value falls to zero at expiration.
Use "strike price" and "exercise price" correctly as synonyms.
What Is Exercise Value?
Exercise value is what an option holder would receive by exercising the option right now, based on the current underlying price. It is sometimes called intrinsic value, though the CFA curriculum favors "exercise value."
Exercise value depends on two numbers only: the current price of the underlying and the strike price . It does not depend on time to expiration or volatility. Those factors affect time value instead.
Call Option Exercise Value
A call option gives the holder the right to buy the underlying at the strike price. Exercising is worthwhile only if the underlying is trading above the strike.
If is below , exercising the call would mean buying at a price above the market. No holder does that. Exercise value drops to zero instead of going negative.
Put Option Exercise Value
A put option gives the holder the right to sell the underlying at the strike price. Exercising is worthwhile only if the underlying is trading below the strike.
If is above , exercising the put would mean selling below the market price. The holder would not do that, so exercise value is zero.
What Is Option Moneyness?
Moneyness describes the relationship between the underlying price and the strike price at a given moment. It tells you, without doing any math, whether an option currently has positive exercise value.
Moneyness applies separately to calls and puts because the two contract types respond to and in opposite directions.
In the Money, At the Money, and Out of the Money
Moneyness | Call Condition | Put Condition | Exercise Value |
|---|---|---|---|
In the money (ITM) | Positive | ||
At the money (ATM) | Zero | ||
Out of the money (OTM) | Zero |
Notice that call and put moneyness move in opposite directions for the same underlying price. When a call is in the money, the equivalent put with the same strike is out of the money.
What Is Time Value?
Time value is the part of an option's price that exceeds its exercise value. It compensates the option writer for the risk that the underlying moves further in the holder's favor before expiration.
Time value is largest when there is more time remaining and more uncertainty about where the underlying will end up. As expiration approaches, less time remains for the underlying to move, so time value decays. At expiration, there is no time left, so time value equals zero and the option is worth exactly its exercise value.
An out-of-the-money option can still trade at a positive price before expiration. That price is pure time value, since exercise value is zero.
Exercise Value vs Time Value
Option value is the sum of the two components at any point before expiration:
Exercise value is fixed by and at a single moment. Time value is the market's judgment about what might happen before the contract ends. Every option price you see quoted is really these two numbers added together, even though the quote shows only one figure.
Worked Example
An underlying stock trades at $52. Both a call and a put on this stock have a strike price of $50 and three months to expiration.
Call option:
Quoted price: $4.50
Moneyness: in the money, since
Put option:
Quoted price: $1.20
Moneyness: out of the money, since
The call carries value from both an immediate payoff and remaining time. The put has no immediate payoff today. Its entire $1.20 price reflects the market's view that the stock could fall below $50 before expiration.
If both contracts reached expiration with the stock still at $52, the call would be worth $2.00 and the put would be worth $0.00. Time value in both cases would disappear.
Common Exam Traps
Calling an out-of-the-money option worthless before expiration. An OTM option has zero exercise value, but it can still trade at a positive price because of time value. Worthless only applies at expiration.
Allowing exercise value to become negative. Exercise value is bounded at zero by the max() function. A candidate who calculates or without applying the floor will get a wrong, and sometimes negative, answer.
Confusing option premium with exercise value. The premium is the full market price. Exercise value is only one component of that price. Time value makes up the difference.
Reversing call and put moneyness. A call is in the money when . A put is in the money when . Mixing these up flips every classification on the exam.
Practice Questions
A stock trades at $75. A put option on the stock has a strike price of $80 and a current market price of $6.25. What is the put's time value?
$1.25
$5.00
$6.25
Correct Answer: A
The put is in the money because , so it has positive exercise value. The remaining $1.25 of the quoted price is time value.
Option B: Uses the exercise value alone, ignoring that time value must be backed out of the quoted price.
Option C: Uses the full option price as if none of it were exercise value, treating the entire premium as time value.
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FAQs About Option Exercise Value, Moneyness, and Time Value
Is strike price the same as exercise price?
Yes. The CFA curriculum uses both terms for the same thing: the fixed price at which the option holder can buy or sell the underlying.
Can time value be negative?
No. Time value is normally zero or positive. A quoted price below exercise value would create a pure arbitrage opportunity, which markets correct quickly.
Why does time value disappear at expiration?
There is no time left for the underlying price to move further in the holder's favor. Only the immediate payoff, the exercise value, remains.