




In options trading, the time value of an option is the portion of the option premium that is above and beyond the intrinsic value of the option. The time value of a put option or call option offsets the risk involved in writing the option and compensates the writer for assuming that risk. Time value is chiefly determined by the amount of time left until the option expires  along with the volatility and dividends of the underlying security, as well as the current riskfree interest rate (i.e. Tbill rate). Behaving in true accordance with its name, the time value of an option starts high when the option is first opened (typically the greatest amount of risk), and tends to decrease as the option's expiration date approaches. When the option expires, risk and time value are both zero. When an option is inthemoney, its intrinsic value and time value are added together to determine the option's premium. When an option is atthemoney or outofthemoney, time value is the sole component of the option's premium.
Rate this Time Value definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: quality assurance, minority interest, command economy, Zero Cost Collar, APR, annual return, Key Rate Duration, average price per share, exdividend date, phantom income, risk management, in escrow, EBITDA, diluted share, option premium, cancelled check, covered put, required rate of return, labor relations, VIX, balance sheet, current ratio, LIBOR, real GDP, 401a, debt service coverage, 1031 exchange, margin rate, 144a, liquidity ratio, class C shares, whollyowned subsidiary, deferred tax, irrevocable trust, 1035 exchange, stock market close, deferred revenue, implied volatility, reverse mortgage, retained earnings, dividends payable, inflation, stock split, open position, limit order, exdividend, FICO score, FTSE, per diem


 