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Time Value

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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 risk-free interest rate (i.e. T-bill 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 in-the-money, its intrinsic value and time value are added together to determine the option's premium. When an option is at-the-money or out-of-the-money, time value is the sole component of the option's premium.



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