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+A Complete Guide to the Futures mArket
+ ■ Factors That Determine Option Premiums
+An option’s premium consists of two components:
+Premiu mi ntri nsic v aluet imev alue=+
+The intrinsic value of a call option is the amount by which the current futures price is above the strike 
+price. The intrinsic value of a put option is the amount by which the current futures price is below the 
+strike price. In effect, the intrinsic value is that part of the premium that could be realized if the option were 
+exercised and the futures contract offset at the current market price. For example, if July crude oil futures 
+were trading at $74.60, a call option with a strike price of $70 would have an intrinsic value of $4.60. The 
+intrinsic value serves as a floor price for an option. Why? Because if the premium were less than the intrinsic 
+value, a trader could buy and exercise the option, and immediately offset the resulting futures position, 
+thereby realizing a net gain (assuming this profit would at least cover the transaction costs).
+Options that have intrinsic value (i.e., calls with strike prices below the current futures price and 
+puts with strike prices above the current futures price) are said to be in-the-money. Options with no 
+intrinsic value are called out-of-the-money options. An option whose strike price equals the futures 
+price is called an at-the-money option. The term at-the-money is also often used less restrictively to refer 
+to the specific option whose strike price is closest to the futures price.
+An out-of-the-money option, which by definition has an intrinsic value of zero, nonetheless retains 
+some value because of the possibility the futures price will move beyond the strike price prior to the expi-
+ration date. An in-the-money option will have a value greater than the intrinsic value because a position in 
+the option will be preferred to a position in the underlying futures contract. 
+reason: Both the option and 
+the futures contract will gain equally in the event of favorable price movement, but the option’s maximum 
+loss is limited. The portion of the premium that exceeds the intrinsic value is called the time value.
+It should be emphasized that because the time value is almost always greater than zero, one should 
+avoid exercising an option before the expiration date. Almost invariably, the trader who wants to 
+offset his option position will realize a better return by selling the option, a transaction that will yield 
+the intrinsic value plus some time value, as opposed to exercising the option, an action that will yield 
+only the intrinsic value.
+The time value depends on four quantifiable factors
+7:
+ 1. the relationship between the strike price and the current futures price. As illus-
+trated in Figure 34.1, the time value will decline as an option moves more deeply in-the-money 
+or out-of-the-money. 
+deeply out-of-the-money options will have little time value, since it is 
+unlikely the futures will move to (or beyond) the strike price prior to expiration. deeply in-
+the-money options have little time value because these options offer very similar positions to 
+the underlying futures contracts—both will gain and lose equivalent amounts for all but an 
+extreme adverse price move. In other words, for a deeply in-the-money option, the fact that the 
+7 Theoretically, the time value will also be influenced by price expectations, which are a non-quantifiable factor.