Time value

The option premium is always greater than the intrinsic value. This extra money is for the risk which the option writer/seller is undertaking. This is called the Time value.

Time value is the amount the option trader is paying for a contract above its intrinsic value, with the belief that prior to expiration the contract value will increase because of a favourable change in the price of the underlying asset. The longer the length of time until the expiry of the contract, the greater the time value. So,

Time value = option premium – intrinsic value

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