Time value
Also called: extrinsic value, option time value
The part of an option's premium above its intrinsic value, paying for the chance of a favourable move before expiry.
Time value is largest for at-the-money options with plenty of time left. It shrinks as expiry approaches, faster near the end, and is zero at expiry. Its decay works against option buyers and for sellers.
Example
A call costing ₹70 with ₹50 of intrinsic value has ₹20 of time value.
Learn more in these lessons
- Moneyness, intrinsic value and time valueWhat makes up an option's premium, and why does it shrink as expiry approaches?
- Theta, time decay and vegaWhy can an option lose value even when the share moves the right way?
- The risks of buying and selling optionsIs it riskier to buy options or to sell them?
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