An option’s premium splits into two parts: intrinsic value and time value. Intrinsic value is the immediate worth of exercising the contract—\(\max(0,S-K)\) for a call and \(\max(0,K-S)\) for a put. Anything above this amount is the time value. Out-of-the-money and at-the-money contracts consist entirely of time value. Time value grows with higher Implied Volatility (\(IV\)) and longer Time to Expiration, but it steadily erodes as expiration approaches. When an option is In-the-money (ITM), it carries intrinsic value plus whatever time value remains.