Why Is Time Value Highest for At-the-Money (ATM) Options?

Time value is highest for at-the-money (ATM) options because they have the greatest uncertainty about whether they will expire in-the-money or out-of-the-money. The strike price is very close to the current asset price, so any small move in the underlying asset could make the option profitable.

This uncertainty gives the option the most potential to gain intrinsic value. In contrast, deep OTM options are unlikely to become profitable, and deep ITM options already have high intrinsic value, so both have less uncertainty and thus lower time value.