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:
“We operate exclusively with things that do not exist, with lines, surfaces, bodies, atoms, divisible time spans, divisible spaces—how could explanations be possible at all when we initially turn everything into images, into our images!”
—Friedrich Nietzsche (1844–1900)
“The race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.”
—Bible: Hebrew Ecclesiastes, 9:11.