Time Value of a Call Option
Commonly a reference to the difference between an option's price and its parity or intrinsic value. Unfortunately, the term is misleading because it fails to distinguish its two most important constituents: basis value and volatility value. A series of simple word equations should help clarify some of these relationships. Time value is in quotation marks in these equations to reflect its common but confusing usage.
option price = intrinsic value + 'time value' = Premium (1) = parity + basis (1) + insurance 'time value' = basis (1) + volatility value = basis (1) + insurance = Premium (2)
For out of the money options: 'time value' = volatility value = opportunity value
See also Option Premium (2), Premium (4) (diagrams), Volatility Value.
|
