Time value is, as above, the difference between option value and intrinsic value, i.e.
Time Value = Option Value - Intrinsic Value.
More specifically, TV reflects the probability that the option will gain in IV — become (more) profitable to exercise before it expires. An important factor is the option's volatility. Volatile prices of the underlying instrument can stimulate option demand, enhancing the value. Numerically, this value depends on the time until the expiration date and the volatility of the underlying instrument's price. TV cannot be negative (because the option value is never lower than IV), and converges to zero at expiration. Prior to expiration, the change in TV with time is non-linear, being a function of the option price.
Read more about this topic: Option Time Value
Famous quotes containing the word time:
“Every true man is a cause, a country, and an age; requires infinite spaces and numbers and time fully to accomplish his design;—and posterity seem to follow his steps as a train of clients.”
—Ralph Waldo Emerson (1803–1882)
“I waited alone, in the company of orchids, roses and violets who—like people waiting beside you, but to whom you are unknown—maintained a silence which their individuality of living things rendered more imposing and in their chilly manner received the heat from an incandescent coal fire, preciously placed behind a crystal glass, in a white marble tub where it dropped, from time to time, its dangerous rubies.”
—Marcel Proust (1871–1922)