Time Value
The portion of an option's premium beyond its intrinsic value, reflecting the probability that the option moves further in the money before expiry.
Formula
Time Value = Premium − Intrinsic Value
Time value (also called extrinsic value) is the premium a buyer pays for the possibility of a favourable move before expiration. It is highest for at-the-money options and decays as expiry approaches.
The rate of time decay accelerates in the final weeks before expiration — this non-linear decay is quantified by theta. Higher implied volatility inflates time value because a wider expected price distribution creates more optionality.
Related Terms
At the Money (ATM)
An option whose strike price equals (or is very close to) the current spot price of the underlying.
IntermediateExercise
The act of an option holder invoking their right to buy (call) or sell (put) the underlying at the strike price.
IntermediateExpiration Date
The last date on which an option can be exercised; after this date the contract ceases to exist.
IntermediateImplied Volatility
The market's forward-looking expectation of volatility, derived by solving the options pricing model for the volatility that matches the observed premium.
AdvancedIntrinsic Value
The immediate exercise value of an option — how much in the money it is right now, ignoring time and volatility.
IntermediateLEAPS
Long-term Equity AnticiPation Securities — listed options with expirations longer than one year. Used for longer-horizon directional bets or low-cost covered-call strategies.
IntermediateOptions Contract
A contract giving the buyer the right — but not the obligation — to buy or sell an underlying asset at a set price before or on expiration.
BeginnerPremium
The price paid by the option buyer to the option seller for the rights granted by the contract.
IntermediateTheta
The daily rate of time value erosion in an option's price, assuming all else stays constant. Usually negative for long options.
Intermediate