Time Value

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Definition of 'Time Value'

In options trading, the time value of an option is the value associated with the option's priced based on the time left to expiration. The time value is the difference between the options premium (price) and the intrinsic value of the option.

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Time Value Decay for an option

For example, if we have a call option with a strike price of $45 and the underlying security is trading at $48 and there are 3 months left to expiration then the intrinsic value of the option is $3. However, you would not be able to buy the option at $3 because there is the uncertainty and potential that the underlying security might rise (or fall) in the next 3 months which will impact the final value of the option. This extra premium that you pay (or receive if selling) over the intrinsic value is known as the time value of an option.

The time value of an option will decrease over time and this decrease will accelerate towards the end of the life of the option.

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