What Is the Relationship between an option’S’moneyness’ and Its Time Value?

Time value is highest for options that are at-the-money (ATM), meaning the strike price is equal to the underlying price. This is because ATM options have the highest probability of moving significantly in either direction.

As an option moves deep in-the-money (ITM) or deep out-of-the-money (OTM), its time value decreases because the outcome is less uncertain, and the premium is mostly composed of intrinsic value (ITM) or near zero (OTM).