Why Is an ATM Option’s Time Value Highest Compared to ITM or OTM?

An at-the-money (ATM) option has the highest time value because it has the highest probability of ending up either in-the-money or out-of-the-money. This state of maximum uncertainty gives it the greatest potential for future profit, which the extrinsic value represents.

ITM options already have a high probability of profit (intrinsic value), and OTM options have a low probability, reducing their time value component.