How Is ‘Time Value’ Calculated, and What Does It Represent?
Time value, or extrinsic value, is calculated as the Option Premium minus the Intrinsic Value. It represents the value attributed to the probability that the option will move further into the money before expiration.
It is essentially the price of uncertainty and the potential for future profit.
Glossar
Price of Uncertainty
Valuation ⎊ The price of uncertainty, within cryptocurrency options and financial derivatives, represents the premium embedded in an instrument’s cost reflecting the potential for unforeseen market movements.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
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.
Market Volatility
Dispersion ⎊ Market volatility within cryptocurrency, options, and derivatives contexts represents the magnitude of price fluctuations over a defined period, quantified typically by standard deviation or variance of logarithmic returns.