How Does the Concept of “Time Value” Apply to Options Pricing?
The time value of an option is the portion of its premium that exceeds its intrinsic value. Intrinsic value is the profit if the option were exercised immediately.
Time value reflects the probability that the option will move further in-the-money before expiration. It is positively correlated with the time remaining until expiration and the volatility of the underlying asset.
Glossar
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
Time Remaining
Duration ⎊ The remaining time until an option's expiration, or its duration, is a primary input that directly influences the extrinsic value component of the option premium.
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
Risk-Free Rate
Determinant ⎊ A risk-free rate, within cryptocurrency derivatives, represents the theoretical return on an investment with zero risk of financial loss over a given period, often proxied by yields on highly-rated sovereign debt denominated in a stable currency like the US Treasury yield.
Time Value
Duration ⎊ The temporal dimension inherent in cryptocurrency derivatives, options trading, and financial instruments fundamentally defines time value.