Chapter 1: Definitions 11 
When a call has time remaining to its expiration date, its total price consists of 
its intrinsic value plus its time value premium. The resultant call option price curve 
takes the form of an inverted arch that stretches along the stock price axis. If one 
plots the data from Table 1-4 on the grid supplied in Figure 1-2, the curve assumes 
two characteristics: 
1. The time value premium ( the shaded area) is greatest when the stock price and 
the striking price are the same. 
2. When the stock price is far above or far below the striking price (near the ends 
of the curve), the option sells for nearly its intrinsic value. As a result, the curve 
nearly touches the intrinsic value line at either end. [Figure 1-2 thus shows both 
the intrinsic value and the option price curve.] 
This curve, however, shows only how one might expect the XYZ July 50 call 
prices to behave with 6 months remaining until expiration. As the time to expiration 
grows shorter, the arched line drops lower and lower, until, on the final day in the life 
of the option, it merges completely with the intrinsic value line. In other words, the 
call is worth only its intrinsic value at expiration. Examine Figure 1-3, which depicts 
three separate XYZ calls. At any given stock price (a fixed point on the stock price 
scale), the longest-term call sells for the highest price and the nearest-term call sells 
for the lowest price. At the striking price, the actual differences in the three option 
prices are the greatest. Near either end of the scale, the three curves are much clos­
er together, indicating that the actual price differences from one option to another 
are small. For a given stock price, therefore, option prices decrease as the expiration 
date approaches. 
TABLE 1-4. 
The prices of a hypothetical July 50 call with 6 months of time 
remaining, plotted in Figure 1-2. 
XYZ Stock Price 
(Horizontal Axis) 
40 
45 
48 
➔SO 
52 
55 
60 
XYZ July 50 
Call Price 
(Vertical Axis) 
2 
3 
4 
5 
61/2 
11 
Intrinsic 
Value 
0 
0 
0 
0 
2 
5 
10 
Time Value 
Premium 
(Shading) 
2 
3 
4 
3 
11/2 
1