




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


 