Time Value

The next consideration for options values is the time value. This is measured by taking the option price minus the intrinsic value. This is when the price of an option goes beyond the intrinsic value. It is associated with the time between when an option is set up and when it might expire. Sometimes the volatility of the stock in question might be a factor for what makes the time value works. This is a measurement of how likely it would be for an option to reach the strike price before the contract expires. When there is more time available, the stock will have a better chance of getting in the money. Here’s an example of how this works:

1. A stock has a $70 call with a $30 premium.
2. That stock is also trading at $90 at the moment. The intrinsic value would then be $20.
3. The intrinsic value is subtracted from the premium. By subtracting $20 from $30, we have a result of $10. That would be the time value at this point. The time value is always worth something when the stock is in the money.

Think of this as a look at how valuable an option might be. It measures the likelihood that the option will increase in its value before it expires. This gives you an idea of how much of a risk is involved with a stock.

The time value should be higher when there is more time before the option expires. The cost to enter into an option might be higher if the time value is greater because there is a better chance for the option actually working as hoped.

As the time changes, the stock should become easier to trade. At the same time, you might have to pay something extra if there is a chance for the stock to rise. This could be a concern for your strategy given that there is no guarantee that the value will actually go up.