Time Value
Also called: time value, extrinsic value, option time premium, theta value.
Formula
Time value = Premium - Intrinsic value.
How it is read
Time value is the reason an option can lose money while the underlying does nothing at all. It erodes as expiry approaches. That erosion is usually described as speeding up into the final sessions. It is not usually described as a steady daily rate. Time value also grows and shrinks with implied volatility. That is the market's assumption about future movement. The assumption can rise, typically ahead of a known, dated event. Time value rises with it. When the event is past and the doubt clears, time value falls away.
What it does not tell you
Time value is a residual. A residual is what is left when one part is taken out of another. It is not a directly quoted number. So it inherits any staleness in the premium it comes from. It does not decay on a schedule anyone can rely on. The same option can lose more time value on a quiet day than on a busy one. A change in implied volatility can add value faster than the calendar takes it away. A falling time value is not evidence about direction. It happens to calls and puts alike.
See it in an experiment
Change one input in Market X-Ray and watch what happens.
Market X-Ray: Expiry — What remains when an option reaches expiry?
Related concepts
What an Option Premium Is Made Of: Intrinsic Value and Time Value
An option's premium is two different things added together. Intrinsic value is what the option would be worth if it expired right now. That is pure arithmetic on the strike and the current level, and never less than zero. Time value is everything else: the amount paid for the chance that the underlying moves further before expiry. Intrinsic value moves only when the underlying moves. Time value shrinks every day regardless, and is exactly zero at expiry.
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