How Does Time Value (Extrinsic Value) Relate to an Option’s Total Premium?
The total premium (price) of an option is the sum of its intrinsic value and its time value, also known as extrinsic value. Time value is the portion of the premium that exceeds the intrinsic value, reflecting the probability that the option will become more profitable before expiration.
It decays over time, accelerating as the expiration date approaches, a phenomenon known as theta decay.
