What Is ‘Time Value’ in Options Pricing and How Does Early Exercise Affect It?

Time value, or extrinsic value, is the portion of an option's premium that exceeds its intrinsic value. It reflects the probability that the option will move further into the money before expiration.

Early exercise of an American option immediately forfeits any remaining time value. The holder gives up the chance for a greater profit in the future by exercising now, making early exercise generally suboptimal for calls on non-dividend assets.