Time Value

The part of an option's premium above its intrinsic value, reflecting time left and expected volatility.

Example

A premium of 7 with intrinsic value of 5 has time value of 2.

Important

Time value falls to zero by expiry, so a buyer pays for something guaranteed to disappear.

Related terms

  • Intrinsic Value (Option) — The amount an option would be worth if exercised immediately, and zero if exercising would not pay.
  • Time Decay — The loss of an option's time value as expiry approaches, usually faster near the end.
  • Implied Volatility — The level of future price movement that current option prices assume.

Lessons that explain it

  • You pay for intrinsic value, time and uncertainty - and time runs out — An option's price has two parts: what it would be worth if exercised now, and extra value for the time and volatility left. That second part shrinks to zero by expiry. (12 min)

All 578 terms in the Investing glossary