What is Time Value in Options Trading?

What is time value?

Time value is a term used in options trading to refer to the portion of an option’s premium that is attributable to the amount of time left until the option expires. An investor will pay more for an option with a longer time until expiry, because this increases the time available for an option to expire in the money.

When trading options, the premium is determined by the option’s time value, plus its intrinsic value. An option will not have an intrinsic value until the underlying price has exceeded the strike price. If an option is out of the money and the expiry date is approaching, the option is likely to never have an intrinsic value.

Time value example

You can calculate time value by subtracting an option’s intrinsic value from the total premium. For example, if it was mid-July, you might purchase a July 50 option – which is an option with a strike price of 50 that expires at the end of the month. If this had a premium of £40, it would have a time value of £10.

Time value vs time decay: what’s the difference?

Time value and time decay are similar terms, but they mean very different things. While time value is the amount of an option’s premium that is attributable to the option’s time until expiry, time decay measures the reduction of an option’s value as it approaches its expiry date. The closer an option gets to its expiry date while being out of the money, the greater the effects of time decay – because the likelihood that an out-of-the-money option will expire increases.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. 

Professional clients trading spread bets and CFDs can lose more than they deposit.

Options and futures are complex instruments which come with a high risk of losing money rapidly due to leverage. They’re not suitable for most investors. Before you invest, you should consider whether you understand how options and futures work, the risks of trading these instruments and whether you can afford to lose more than your original investment.

Trading stocks and shares ‘on margin’ within a US options and futures account – meaning that you only finance part of the cost of acquiring a position in a security – carries additional risks over buying securities on a fully funded basis and may result in losses exceeding your original investment. Trading on margin will also result in additional costs to you as the investor and any securities purchased using margin may be held as collateral by the lender, restricting both your rights as shareholder, and your ability to use the securities until the margin trade is closed. You should familiarise yourself with these risks before trading on margin.

The value of shares, ETFs and other ETPs bought through a share dealing account, a US options and futures account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results. Some ETPs carry additional risks depending on how they’re structured, investors should ensure they familiarise themselves with the differences before investing.

Share dealing and IG Smart Portfolio accounts provided by IG Trading and Investments Ltd, CFD accounts and US options and futures accounts are provided by IG Markets Ltd, spread betting provided by IG Index Ltd.   

IG is a trading name of IG Trading and Investments Ltd (a company registered in England and Wales under number 11628764), IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. IG Markets Ltd (Register number 195355), IG Trading and Investments Ltd (Register Number 944492) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.   

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Time value definition