How Does a Decrease in Time Value Affect the Price of an OTM Option?
A decrease in time value directly reduces the price (premium) of an Out-The-Money (OTM) option. Since an OTM option's premium is entirely composed of time value, the loss of time value is a direct loss for the option buyer.
Glossar
Loss of Time Value
Decay ⎊ Loss of time value, or extrinsic value decay, is the phenomenon where an option's price erodes as the time remaining until its expiration decreases.
Decrease in Time Value
Decay ⎊ A reduction in the time value of an option or derivative reflects the erosion of extrinsic value as the expiration date approaches, impacting profitability calculations.
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.