What is time value of an Option?

The time value of an option is the difference between its premium and its intrinsic value. All options in Out of the Money (OTM) and At The Money (ATM) have a time value.

Time value = premium - intrinsic value

• For call option

Intrinsic value = current price of the underlying asset - strike price

• For put options

Intrinsic value = strike price - current price of the underlying asset

The longer the time to expiration, the higher the time value of an option. The time value at maturity is zero. The time value is also referred to as extrinsic value, as other factors besides the intrinsic value also influence the premium of an option.

An option contract that is well before its expiration date has a greater potential to be "in the money" or to move in the direction desired by the buyer. For example, if one option is three months before the expiration date and the other two months before, the first has a higher time value.