Time value is the portion of an option's price that reflects the potential for value to change before expiration, beyond its current intrinsic value.
In options pricing, the total premium consists of intrinsic value (the amount by which the option is in-the-money) and time value (the extrinsic portion). Time value compensates the holder for the possibility of favorable moves before the option expires. Longer time to expiration generally raises time value, and higher implied volatility also tends to lift it because bigger expected price swings increase the chance the option becomes profitable. Conversely, as expiration approaches, time value decays, a phenomenon known as theta (time decay).
Traders compare options with different expirations to gauge how much premium is tied to potential time-driven movement versus current in-the-money value. Time value is often larger for options that are at- or near-the-money and for contracts with more time remaining. It is influenced by other factors such as interest rates and expected dividends, which slightly adjust the price of delayed payoff.
Option pricing models (for example, the Black-Scholes framework) separate value into intrinsic and extrinsic components, with time value capturing the extrinsic portion due to time and volatility.
If a stock is trading at $105 and a call with a $100 strike expiring in one month trades for $7, the intrinsic value is $5 and the remaining $2 is time value.
Intrinsic value · Option premium · Extrinsic value · Theta (time decay) · Implied volatility · Black-Scholes model · Delta