The time value of the option depends on, Options Premium Explained | The Options & Futures Guide

Also known simply as option price.

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Not to be confused with the strike price. Market price, volatility and time remaining are the primary forces determining the premium.

There are two components to the options premium and they are intrinsic value and time value. Intrinsic Value The intrinsic value is determined by the difference between the current trading price and the strike price.

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Only in-the-money options have intrinsic value. Intrinsic value can be computed for in-the-money options by taking the difference between the strike price and the current trading price. Out-of-the-money options have no intrinsic value.

  • The Options Industry Council (OIC) - Options Pricing
  • In options trading, time value refers to the portion of an option's premium that is attributable to the amount of time remaining until the expiration of the option contract.
  • Finance Magnates Telegram Channel What makes options unique is that their value not only depends on how far the market moves in a certain direction, but also on other important trading factors.
  • The time value of premia declines as the option goes more ITM "in-the-money" or OTM "out-of-the-money"ceteris paribus.
  • Note: Intrinsic value arises when an option gets in the money.
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Time Value An option's time value is dependent upon the length of time remaining to exercise the option, the moneyness of the option, as well as the volatility of the underlying security's market price.

The time value of an option decreases as its expiration date approaches and becomes worthless after that date. This phenomenon is known as time decay.

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As such, options are also wasting assets. For in-the-money optionstime value can be calculated by subtracting the intrinsic value from the option price.

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Time value decreases as the option goes deeper into the money. Typically, higher volatility give rise to higher time value. In general, time value increases as the uncertainty of the option's value at expiry increases.

  • Options Premium Explained | The Options & Futures Guide
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Effect of Dividends on Time Value Time value of call options on high cash dividend stocks can get discounted while similarly, time value of put options can get inflated. For more details on the effect of dividends on option pricing, read this article.

Interest rate Dividends and risk-free interest rate have a lesser effect. Changes in the underlying security price can increase or decrease the value of an option.