What Is the ‘Time Value’ Component of an Option?
The 'time value' (or extrinsic value) of an option is the portion of the option's premium that exceeds its intrinsic value. It represents the probability that the option will become profitable (in-the-money) before its expiration date.
Time value is highest when an option has a long time until expiration and decays to zero as the expiration date approaches, a phenomenon known as theta decay.
