The total premium for an option consists of an intrinsic value plus a speculative premium, which declines to zero by the expiration date.

Question

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The intrinsic value of an option is the difference between the current market price and the strike price, while the speculative premium is the additional amount the buyer is willing to pay for the option. As the expiration date approaches, the time value of the option (which makes up the speculative premium) decreases until it reaches zero at expiration. Therefore, the total premium for an option is composed of its intrinsic value and its speculative premium, both of which can change over time.

The Total Premium for an Option Consists of an Intrinsic