246 Part Ill: Put Option Strategies 
price. On the other hand, if the stock price were above the striking price of the put 
option at expiration, the put would be worthless. No one would logically want to exer­
cise a put option to sell stock at the striking price when he could merely go to the 
open market and sell the stock for a higher price. Thus, as the price of the underly­
ing stock declines, the put becomes more valuable. This is, of course, the opposite of 
a call option's price action. 
The meaning of in-the-money and out-of-the-money are altered when one is 
speaking of put options. A put is considered to be in-the-money when the underlying 
stock is below the striking price of the put option; it is out-of the-money when the 
stock is above the striking price. This, again, is the opposite of the call option. IfXYZ 
is at 45, the XYZ July 50 put is in-the-money and the XYZ July 50 call is out-of-the­
money. However, ifXYZ were at 55, the July 50 put would be out-of-the-money while 
the July 50 call would be in-the-money. The broad definition of an in-the-money 
option as "an option that has intrinsic value" would cover the situation for both puts 
and calls. Note that a put option has intrinsic value when the underlying stock is 
below the striking price of the put. That is, the put has some "real" value when the 
stock is below the striking price. 
The intrinsic value of an in-the-money put is merely the difference between 
the striking price and the stock price. Since the put is an option (to sell), it will gen­
erally sell for more than its intrinsic value when there is time remaining until the 
expiration date. This excess value over its intrinsic value is referred to as the time 
value premium, just as is the case with calls. 
Example: XYZ is at 47 and the XYZ July 50 put is selling for 5, the intrinsic value is 
3 points (50- 47), so the time value premium must be 2 points. The time value pre­
mium of an in-the-money put option can always be quickly computed by the follow­
ing formula: 
Time value premium p . S k · St "ki · • ) == ut option + toe pnce - n ng pnce (m-the-money put 
This is not the same formula that was applied to in-the-money call options, although 
it is always true that the time value premium of an option is the excess value over 
intrinsic value. 
Time value premium Call ti S ·ki · St k · . all == op on + tn ng pnce - oc pnce (m-the-money c ) 
If the put is out-of-the-money, the entire premium of the put is composed of time 
value premium, for the intrinsic value of an out-of-the-money option is always zero.