An option before expiration is not its payoff diagram

explainerPublished 19 October 20262 min readoptions

Key points

• Intrinsic value is the payoff if the option expired now. Time value is the rest of the premium.
• Greeks are sensitivities of a model price. They are not a forecast.
• Exercise style and assignment can change the position before the diagram’s final day.

What is going on

A long call pays off when the asset finishes above the strike, by that difference, and the buyer has already paid the premium. A long put is the mirror for a fall. Spreads combine these and cap both gain and loss relative to a naked option. American-style exercise can happen before the end. Assignment can turn a short option into a share or futures position. The Options Clearing Corporation and the exchange write the contract terms. The payoff calculator on this site draws an expiry payoff from strikes and premiums you type. It does not know implied volatility.

Why it matters

Suppose a call’s strike is 100 and the asset is 105. Intrinsic value is 5. If the premium is 8, the other 3 is time value. If nothing else changes and time passes, that 3 can decay even while the asset price is unchanged. Implied volatility is the volatility number that, inside a model, matches the premium. A higher premium can mean higher volatility, more time, or a higher asset price. You cannot read which from the premium alone. These prices are a worksheet.

What to watch

Read the expiry, the strike, the multiplier and whether the option is American or European. Watch assignment dates if you are short. The markets page for options is the instrument primer. This note is the reason a payoff diagram is not a valuation.

Risks

Long options can expire worthless, so the premium is lost. Short options can lose more than the premium received. Model Greeks fail when the market gaps. Liquidity in a far strike can make the theoretical price a poor guide to the trade.