Time Value

Definition of 'Time Value'


The portion of an option's premium that is attributable to the amount of time remaining until the expiration of the option contract. An option's premium is comprised of two components: its intrinsic value and its time value. The intrinsic value is the difference between the price of the underlying (for example, the underlying stock or commodity) and the strike price of the option. Any premium that is in excess of the option's intrinsic value is referred to as its time value.

Investopedia explains 'Time Value'


The price (or cost) of an option is an amount of money known as the premium. An option buyer pays this premium to an option seller in exchange for the right granted by the option: the choice (the "option") to exercise the option or allow it to expire worthless. The premium is equal to the intrinsic value plus the option's time value. The intrinsic value for a call option is equal to the underlying price minus the strike price; the intrinsic value for a put option is equal to the strike price minus the underlying price.

An option's time value is equal to its premium (the cost of the option) minus its intrinsic value (the difference between the strike price and the price of the underlying). As a general rule, the more time that remains until expiration, the greater the time value of the option. This is because investors are willing to pay a higher premium for more time since the contract will have longer to become profitable due to a favorable move in the underlying.

In general, an option loses one-third of its time value during the first half of its life, and the remaining two-thirds of its time value during the second half. Time value decreases over time, eventually decaying to zero at expiration, a phenomenon known as time decay.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center