




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


 