Option time value
An option price can be broken into two types of value. They are commonly refered to as Implicit Value, and Time Value. The implist value of an option is the differnce between the "Exersize Price" of the Option and the current value of the underlying asset. Assuming that the option be expired now the implicit value is thus the value that would be received. The time value of an option is what is left.
Time Value = Option Price - Implicit Value
Where Implicit value of a call option is,
Implicit Value = Current Asset Price - Exersize Price
With a minimum value of "0". An option cannot have a negative implicit value.
Examples
Current Asset Underlying the Option = $15
Option 1 = $.05
Call
Exersize Price = $20.00
Implicit Value = $15 - $20 = -5
As we know an option cannot be negative we deduce it must have a Zero implicit value.
Time value = $0.05 - 0 = $0.05
Option 3 = $5.05
Call
Exersize Price = $10.00
Implicit Value = $15 - $10 = $5
Thus option 2 has an implicit value of $5
Time value = $5.05 - $5 = $0.05
Referenced By
Finance | Finance and investment | Financial | Financial mathematics | List of finance topics | Mathematical finance | The Greeks
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