Time Value
Time value is the portion of an option’s premium that reflects its potential to gain value before expiry. It represents the possibility that market conditions may move in the option’s favour while time remains, but this is not guaranteed.
As the expiry date approaches, this potential - and therefore the time value - gradually decreases. This process is known as time decay. Time value is influenced by several factors, including volatility, interest rates, and the time remaining until the option expires.
An option with more time left until expiry typically has higher time value, because there is more opportunity for the underlying asset’s price to change. However, the time value may decline even if market conditions fluctuate.
Why time value matters to investors
Understanding time value helps investors:
● Observe how an option’s price may change as expiry nears
● Consider the affects of time decay on option value
● Analyse option prices by separating intrinsic value and time value
● Recognise how time decay interacts with overall option pricing
The balance between time value and intrinsic value is a central factor in how options are priced and how their value may change over time.
Options are complex products and may lose value as expiry approaches. The potential loss includes the full premium paid, and options are not suitable for all investors.