Time value definition

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.

Discover how to trade options

Learn more about options trading and how to get started.

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.

What is the significance of time value for traders?

Time value is significant as most traders will be willing to pay more for an option with a greater time value. This is because there is more time for the option to become in the money, rather than expiring worthless.

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.

Build your trading knowledge

Discover how to trade with IG Academy, using our series of interactive courses, webinars and seminars.

A - B - C - D - E - F - G - H - I - L - M - N - O - P - Q - R - S - T - U - V - W - Y

See all glossary trading terms

Help and support

Get answers about your account or our services.

Get answers

Or ask about opening an account on 0800 195 3100 or newaccounts.uk@ig.com.

We're here 24hrs a day from 8am Saturday to 10pm Friday.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% 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. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.