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Trading and Investment Terms

Time Value

In the options trading world, two components make up an option's price. 

The first is the intrinsic value (which accounts for the underlying security's perceived value), and the second is time value.

 

Time value is the risk premium that the seller requires to provide the option buyer with the right to buy/sell the stock up to the expiration date. Think of this component as the "insurance premium" of the option.

 

When calculating time value, it is measured as any value of an option other than its intrinsic value.

Option Price - Intrinsic Value = Time Value

 

For example, if Company XYZ is trading for $25 and the XYZ 20 call option is trading at $7, then we would say that the option has an intrinsic value of $5 ($25 - $20 = $5), and the time value of $2 ($7 - $5 = $2).

Options that have zero intrinsic value are comprised entirely of time value.

 

Time value is the risk premium that the seller requires to provide the option buyer with the right to buy/sell the stock up to the expiration date. Think of this component as the "insurance premium" of the option.

 

When calculating time value, it is measured as any value of an option other than its intrinsic value.

Option Price - Intrinsic Value = Time Value

 

For example, if Company XYZ is trading for $25 and the XYZ 20 call option is trading at $7, then we would say that the option has an intrinsic value of $5 ($25 - $20 = $5), and the time value of $2 ($7 - $5 = $2).

Options that have zero intrinsic value are comprised entirely of time value.

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