What Is the Difference between Intrinsic Value and Time Value in Options and How Does It Affect Loss Aversion?
Intrinsic value is the immediate profit if the option were exercised (In-The-Money). Time value is the portion of the premium based on the chance of the option moving In-The-Money before expiration.
Loss aversion is amplified by the decay of time value (Theta). As time value erodes, the option's worth drops, making the unrealized loss larger and pushing the trader closer to the emotional capitulation point.
Glossar
Decay of Time Value
Erosion ⎊ The decay of time value, particularly within cryptocurrency derivatives and options, represents an inherent erosion of potential profit as the expiration date approaches.
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.
Time Value in Options
Premium ⎊ Time value in options, also known as extrinsic value, represents the portion of an option's market price that is attributable to the possibility of the contract moving into the money before its expiration.
Loss Aversion
Framework ⎊ The concept of loss aversion, initially articulated by Daniel Kahneman and Amos Tversky, fundamentally shapes decision-making processes, particularly within volatile environments like cryptocurrency markets and derivatives trading.
Time Value
Duration ⎊ The temporal dimension inherent in cryptocurrency derivatives, options trading, and financial instruments fundamentally defines time value.