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+The Intelligent Investor’s Guide to Option Pricing  •  57
+before the option expires. The reason for this is that although the intrinsic value 
+represents the actual upside of the stock’s price over the option strike price, 
+there is still the possibility that the stock price will move further upward in the 
+future. This possibility for the stock to move further upward is the potential bit 
+mentioned earlier. Formally, this is called the time value of an option.
+Let us say that our one-year call option struck at $40 on a $50 stock 
+costs $11.20. Here is the breakdown of this example’s option price into in-
+trinsic and time value:
+ $10.00 Intrinsic value: the amount by which the option is ITM
++ $1.20 Time value: represents the future upside potential of the stock
+= $11.20 Overall option price
+Recall that earlier in this book I mentioned that it is almost always a mis-
+take to exercise a call option when it is ITM. The reason that it is almost always 
+a mistake is the existence of time value. If we exercised the preceding option, 
+we would generate a gain of exactly the amount of intrinsic value—$10. How-
+ever, if instead we sold the preceding option, we would generate a gain totaling 
+both the intrinsic value and the time value—$11.20 in this example—and then 
+we could use that gain to purchase the stock in the open market if we wanted.
+Our way of representing the purchase of an ITM call option from a 
+risk-reward perspective is as follows:
+Advanced Building Corp. (ABC)
+5/18/2012 5/20/2013 249 499 749
+EBP = $51.25
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