Dictionary

Time value

The part of an option's price that is not intrinsic; what a buyer pays for the chance the option gets better before expiration.

Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

Time value and extrinsic-value describe the same money from different angles. Extrinsic emphasises that it is everything beyond intrinsic; time value emphasises that it decays to zero by expiration-date.

It is not linear. A 90-day option does not hold three times the time value of a 30-day option — it holds roughly the square root of three, about 1.7 times as much, because uncertainty grows with the square root of time.

Example: XYZ at $50 with 20% implied-volatility. The 30-day $50 call costs about $1.15 and the 90-day about $2.00. All of both prices is time value. Sell the 30-day and buy the 90-day and you have paid $0.85 for 60 extra days — the trade behind every calendar-spread.

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