Option price = intrinsic value + time valuehere are some scenarios for you for a $50 call option on stock xyz (in thesescenarios, assume the time value = $3).when xyz stock is trading at $52:option price = $2 + $3option price = $5then xyz stock falls to $51 per share:option price = $1 + $3option price = $4then xyz stock falls to $50 per share:option price = $0 + $3option price = $3then xyz stock falls to $49 per share:option price = $0 + $3option price = $3even though i said you should assume the time value remains constant through myexamples, the fact is, the further out of the money the option, the less valuable it is toinvestors and the lower the time value will be. for example, if the stock dropped inprice to $45, the time value would drop below $3. but there would still be some timevalue left because the possibility of the option ending up in a profitable position is stillthere.
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