How Is ‘Time Value’ Related to Intrinsic Value?

The total premium (price) of an option is composed of two parts: Intrinsic Value and Time Value (also called extrinsic value). Time value is the amount by which the option's premium exceeds its intrinsic value.

It represents the value derived from the remaining time until expiration and the underlying asset's volatility. As expiration approaches, the time value decays to zero, a phenomenon known as Theta decay, leaving only the intrinsic value at maturity.