Time Value, also known as "extrinsic value," is a component of the price of an option that represents the value of the option beyond its intrinsic value. Intrinsic value is the amount by which an option is in the money, meaning the difference between the current price of the underlying asset and the strike price of the option. Time value, on the other hand, is the value that is derived from the possibility that the option will become in the money in the future.Options contracts have an expiration date, which means that the holder of the option has the right, but not the obligation, to buy or sell the underlying asset at a specific price (strike price) on or before the expiration date. Time value is the value that is derived from the possibility that the option will become in the money in the future, before the expiration date. The longer the time until expiration, the greater the chance that the option will become in the money, and the greater the time value of the option.The time value of an option can be calculated by subtracting the intrinsic value of the option from the total price of the option.For example, if an option has a strike price of $50 and the underlying asset is currently trading at $55, the intrinsic value of the option would be $5. If the total price of the option is $7, the time value of the option would be $2.It's worth noting that time value decreases as the expiration date approaches, and it's known as Time decay or theta. As the expiration date gets closer, the probability of the option becoming in the money decreases, which means that the time value of the option also decreases. This is why options that are closer to expiration are typically less expensive than options that have a longer time until expiration.In summary, Time value is a component of the price of an option that represents the value of the option beyond its intrinsic value. It is the value that is derived from the possibility that the option will become in the money in the future.Time value can be calculated by subtracting the intrinsic value of the option from the total price of the option. It's important to note that as the expiration date approaches, the time value of the option decreases as the probability of the option becoming in the money decreases.
