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 cant nourish our children if we dont nourish ourselves.... Parents who manage to stay married, sane, and connected to each other share one basic characteristic: The ability to protect even small amounts of time together no matter what else is going on in their lives.”
—Ron Taffel (20th century)
“People get a bad impression of it by continually trying to treat it as if it was a bank clerk, who ought to be on time on Tuesday next, instead of philosophically seeing it as a painter, who may do anything so long as you dont try to predict what.”
—Katharine Whitehorn (b. 1926)