Option time value

In finance, the time value (TV) (extrinsic or instrumental value) of an option is the premium a rational investor would pay over its current exercise value (intrinsic value), based on the probability it will increase in value before expiry.

[1] As an option can be thought of as 'price insurance' (e.g., an airline insuring against unexpected soaring fuel costs caused by a hurricane), TV can be thought of as the risk premium the option seller charges the buyer—the higher the expected risk (volatility

price) is estimated via a predictive formula such as Black-Scholes or using a numerical method such as the Binomial model.

As seen on the graph, the full call option value (IV + TV), at a given time t, is the red line.

Numerically, this value depends on the time until the expiration date and the volatility of the underlying instrument's price.

Prior to expiration, the change in TV with time is non-linear, being a function of the option price.