How Does the Probability of an Option Expiring ITM Relate to Its Time Value?

The probability of expiring ITM is a key factor in determining time value. ATM options have the highest time value because their probability of expiring ITM is approximately 50%, representing maximum uncertainty and potential.

Deep OTM options have a very low probability of expiring ITM, leading to low time value. Time value essentially prices this probability of future intrinsic value.