Option Time Value
Option Time Value
The part of an option's price that is not intrinsic value: what buyers pay for the chance that the option becomes more valuable before expiration. Also called extrinsic value. It decays to zero at expiry.
When to use: Use to see what an option buyer is really paying for, to compare the richness of premiums across strikes and expirations, and to understand theta: time value is what theta erodes.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| TimeValue | Time Value | Option price above its exercise value | $ |
| S | Stock Price | Current price of the underlying | $ |
| Strike | Strike Price | Exercise price of the option contract | $ |
| OptionPrice | Market Option Price | Observed market price of the call or put | $ |
| OptionType | Option Type | Call (1) or Put (-1) — enter 1 for a call, -1 for a put | integer |
Real-Life Examples
Example 1: In-the-Money Call
Stock at $110, a $100 call trades at $13.50.
Given
Step-by-Step
Of the $13.50 price, $10 is exercisable value and $3.50 is time value that will be gone by expiration if the stock stays put.
Example 2: Out-of-the-Money Put
Stock at $105, a $100 put trades at $2.40.
Given
Step-by-Step
The put has no intrinsic value, so its entire $2.40 price is time value: a bet that the stock falls below $100 before expiry.
Frequently Asked Questions
At-the-money options with long expirations and high implied volatility. Time value shrinks as an option moves deep into or out of the money, and as expiration approaches.
For deep in-the-money European options it can dip slightly below zero, reflecting the cost of waiting to receive the strike. For American options, which can be exercised early, it is effectively floored at zero.