Glossary
Time value
The part of an option’s premium above its intrinsic value: what buyers pay for the chance the option gains value before it expires.
On this page
Time value, also called extrinsic value, is the portion of an option's price that is not intrinsic value. It is what the buyer pays for possibility: the chance that the stock moves enough before expiration to make the option worth more. An out-of-the-money option is made entirely of time value. At expiration, time value is always zero.
How it works
Three things drive how much time value an option carries: the time left until expiration, implied volatility (bigger expected swings make the chance of a payoff larger), and how close the strike is to the stock price. Time value peaks at the money and shrinks for deep in-the-money and far out-of-the-money strikes. Interest rates and dividends have a smaller effect.
Why it matters
Time value is what an option buyer is betting against. It erodes every day, a decay measured by theta, and faster near expiration. It is also why exercising an American-style call early is usually a mistake: exercising captures only intrinsic value and throws away whatever time value remains, which selling the option would have collected. The main exception is just before an ex-dividend date, when a dividend can outweigh the remaining time value.