Explain the Concept of “Time Value” in Option Pricing.
Time Value (Extrinsic Value) is the portion of an option's premium that exceeds its intrinsic value. It reflects the possibility that the option will become more valuable (In-the-Money) before expiration.
Time Value is maximized when an option is At-the-Money and decreases as the option approaches expiration, a process measured by Theta.
Glossar
Blockchain
Ledger ⎊ The blockchain functions as a distributed, immutable ledger that chronologically records transactions across a network of decentralized computers.
Option
Contract ⎊ An option, within the cryptocurrency derivatives ecosystem, represents a binding agreement granting the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset ⎊ typically a cryptocurrency or token ⎊ at a predetermined price (strike price) on or before a specified date (expiration date).
Time Value
Duration ⎊ The temporal dimension inherent in cryptocurrency derivatives, options trading, and financial instruments fundamentally defines time value.