11.25What is time value?
1What is it?
The part of the premium above intrinsic value: what buyers pay for the chance that the option becomes more valuable before expiry.
2Why does it exist?
More time and more volatility = more time value. It decays to zero at expiry.
3Calculation
Time value = Premium − Intrinsic value
- Spot 25,200; 25,000 call premium 320; intrinsic 200.
- Time value = 120.
Time value = 120 points.
4Quick revision
- Premium minus intrinsic.
- Decays to zero by expiry.
- Higher with more time/volatility.
5Knowledge check
Q1. Premium 150, intrinsic 0. Time value?Show answer
150 (all time value).
Q2. Time value at expiry?Show answer
Zero.
Q3. What increases time value?Show answer
More time to expiry and higher volatility.