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Option Values and Exercise Values

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Please discuss the following question: Why do options sell for more than their exercise value?

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In about 460 words, this solution discusses the concepts of option values and exercise values, along with the idea of time value which is very much associated with these concepts. The solution is detailed and well presented.

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Option Value = Intrinsic Value (or Exercise value) + Time Value

Options have both intrinsic (exercise) value and time value. Intrinsic (exercise) value is the value that any given option would have if it were exercised today. Intrinsic (exercise) value represents the actual difference between the option's strike price and the market price of the underlying security. If a call option has a $50 strike price and the stock is selling at $55, the option has $5 of intrinsic value. A holder could exercise the option, purchasing 100 shares of the stock for $50 each. He could then immediately sell the stock in the open market for $55, making a profit of $5 per share. ...

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