GlossaryIntermediate
Time Value (Options)
The portion of an option's price that reflects the possibility it becomes more profitable before expiry, beyond its current intrinsic value.
An option's time value is the portion of its market price that reflects the remaining possibility it becomes more profitable before expiry, beyond whatever intrinsic value (see Kaavon's "Intrinsic Value (Options)" glossary definition) it already has.
Time value generally decreases as an option approaches expiry — a well-documented effect often called "time decay" — since less time remains for the underlying price to move favorably, and it reaches zero exactly at expiry, when only intrinsic value remains.
Examples
- An at-the-money option (strike price equal to current spot price) has zero intrinsic value, so its entire market price is time value.
- Time value decays toward zero as an option approaches expiry, a well-known effect sometimes called "time decay."