Intrinsic Value

Intrinsic value is what an option would be worth if exercised right now — the real value already built into the contract. A call's intrinsic value is the stock price minus the strike (if positive); a put's is the strike minus the stock price (if positive). An out-of-the-money option has zero intrinsic value, since exercising it wouldn't do anything for you. Every premium is made up of intrinsic value plus time value — an option deep in-the-money near expiration is priced almost entirely on intrinsic value, while one far out-of-the-money is priced entirely on time value, since it has none.