Basics
Time Value and Greeks
Option price = intrinsic value + time value. Time value decays into expiration.
Price logic
What is inside the price
The option price = intrinsic value + time value. Time value gets smaller as the option approaches expiration. That is reflected by theta.
Premium 8 EUR, spot 105, strike 100: 5 EUR intrinsic value and 3 EUR time value.
Greeks
The four key Greeks
- Delta Reaction to the price move
- Theta How much time value does the option lose per day?
Time decay depends strongly on moneyness: ATM options often decay fastest near expiration, ITM options tend to decay more evenly, and OTM options consist only of time value that falls to zero by expiration.
- Gamma Change in delta
- Vega Reaction to IV
- Example Delta 0.45 means: +1 EUR in the underlying = roughly +0.45 EUR in the option.