Time Value
Candlefocus EditorTime value is the monetary amount that an investor pays for an options contract above its intrinsic value, due to the chance that the option will increase in value prior to expiration. Time value is reflected in an option's price but is not explicitly stated separately. Time value is often referred to as premium, because this is the "extra" that an investor pays for the right to buy or sell a security at a specified price and by a certain date.
Time value is calculated by subtracting the option's intrinsic value from its price. An at-the-money option with no intrinsic value has only time value. Time value consistently decreases with the passing of time, and the closer an option is to its expiration date, the less time value it will have. This decrease happens at an accelerated rate as the option approaches expiration.
Time value is an important factor when valuing an option and helps to determine potential changes in the option's premium following news and events related to the underlying asset. It is also an important idea to consider when trading options, because it means that an option may have a much lower likelihood of ending up in the money, or even a negative intrinsic value, when the time remaining prior to expiration decreases.
In conclusion, time value is a key concept in determining the value of an option and is impacting by a variety of factors such as time left until expiration and implied volatility of the option. Understanding time value, and how it affects an option's overall price, is an important part of any successful options trading strategy.