Time value

Time value is the portion of an option's premium that exceeds its intrinsic value, the amount the option would be worth if it were exercised right now. It represents what the market is willing to pay for the possibility that the option becomes more valuable before it expires, on top of whatever value it already has today.

An option that is out of the money has no intrinsic value at all, since exercising it immediately would produce nothing, which means its entire premium is time value. An option that is in the money has both components, intrinsic value from the gap between the stock price and the strike price, plus additional time value reflecting the chance the option gains even more value before expiration. Time value is driven mainly by how much time remains until expiration and the underlying stock's implied volatility, since more time and more expected movement both increase the odds of a favorable outcome for the option holder.

Time value is not constant, it decays as expiration approaches, a process measured by theta, and it shrinks toward zero as the option nears its expiration date regardless of what the stock is doing. At expiration itself, an option's price consists entirely of intrinsic value, with no time value left at all. This decay is central to options trading, an option buyer is effectively paying for time value that erodes every day, while an option seller collects that same time value as compensation for taking on the risk of the position.