what is time value 
time value refers to the portion of an option s premium that s attributable to the amount of time remaining until the expiration of the option contract the premium of any option consists of two components its intrinsic value and its extrinsic value time value is a component of an option s extrinsic value beside implied volatility iv it relates to derivatives markets it shouldn t be confused with the time value of money tvm which describes the discounting of money s purchasing power over time the basics of time valuethe price or cost of an option is an amount of money known as the premium an option buyer pays this premium to an option seller in exchange for the right granted by the option the choice to exercise the option to buy or sell an asset or to allow it to expire worthless 1the intrinsic value is the difference between the price of the underlying asset and the strike price of the option the intrinsic value for a call option is equal to the underlying price minus the strike price the intrinsic value for a put option which is the right to sell an asset is equal to the strike price minus the underlying price 1an option s total premium is based on its intrinsic plus extrinsic value a key part of extrinsic value is known as time value a contract normally loses value as it approaches its expiration date because there s less time for the underlying security to move favorably an option with one month to expiration that s out of the money otm will have more extrinsic value than that of an otm option with one week left to expiration the more time that remains until the option expires the greater its time value in most cases the contract will more time to become profitable another factor that affects extrinsic value and time value is implied volatility iv iv measures the amount an underlying asset may move over a specified period the extrinsic value will also increase if the iv increases the extrinsic value would rise as investors figure that dramatic moves boost the possibility of the asset moving their way if an investor purchases a call option with an annualized iv of 20 and the iv jumps to 30 the following day time value might be expressed like this as an equation the amount of a premium that s more than the option s intrinsic value is referred to as its time value the option has an intrinsic value of 94 1 044 950 and a time value of 3 97 94 if alphabet inc stock is priced at 1 044 per share and the alphabet inc 950 call option is trading at 97 image by sabrina jiang investopedia 2020the significance of time valuemore time that remains until expiration generally means a greater time value of the option investors are willing to pay a higher premium for more time because the contract will have longer to profit from a favorable move in the underlying asset conversely the less time that remains on an option the less of a premium investors are willing to pay the probability that the option has a chance to be profitable is shrinking it s safer to sell or hold an option that still has time value left for this reason rather than exercising it that remaining time value would otherwise be lost adding time to an option or increasing the iv theoretically has the same fundamental effect they increase the probability that an option will finish in the money itm an option generally loses one third of its time value during the first half of its life and the remaining two thirds of its time value during the second half time value decreases over time at an accelerating pace a phenomenon known as time decay or time value decay an option price s sensitivity to time decay is known as its theta 2