- Time value refers to the portion of an option's premium that is attributable to the amount of time remaining until the expiration of the option contract.
- The premium of any option consists of two components: its intrinsic value and its time value.
- Time Value is also considered as an extrinsic or instrumental value in the options trading context.
- It is the premium a rational investor would pay over its current exercise value (intrinsic value).
- It is based on the probability that it will increase in value before expiry.
- This value is always greater than zero in a fair market, thus an option is always worth more than its current exercise value.
- Time value decays to zero at expiration, with a rule that it will lose 1⁄3 of its value during the first half of its life and 2⁄3 in the second half.