1. What is Time Value of an Option?

The time value of an option represents the portion of the option's premium that exceeds its intrinsic value. It reflects the probability that the option will gain additional intrinsic value before expiration.

2. How Does the Calculator Work?

The calculator uses the simple formula:

Where:

• Premium — The current market price of the option (USD)
• Intrinsic Value — The immediate exercise value of the option (USD)

Explanation: The time value decays as the option approaches expiration (time decay), with the rate of decay accelerating as expiration nears.

3. Importance of Time Value Calculation

Details: Understanding time value helps traders assess whether an option is overpriced or underpriced relative to its remaining time until expiration.

4. Using the Calculator

Tips: Enter the option's current premium and its intrinsic value in USD. Both values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What affects an option's time value?
A: Time value is influenced by time remaining until expiration, volatility, interest rates, and the distance between the strike price and underlying asset price.

Q2: Can time value be negative?
A: No, time value cannot be negative as the minimum option value is its intrinsic value.

Q3: How does time value change as expiration approaches?
A: Time value decays to zero at expiration, with the decay accelerating in the final weeks (theta decay).

Q4: What's the difference between European and American options?
A: American options can be exercised anytime before expiration, while European options only at expiration. This affects time value calculation.

Q5: How does volatility affect time value?
A: Higher volatility increases time value as the chance of the option moving in-the-money increases.