Time value

Time value is the component of an option's premium that reflects the value of having more time for the option to become profitable. It's functionally equivalent to extrinsic value for most practical purposes and decays to zero at expiration through theta decay.

Time value decreases as expiration approaches, not linearly, but in an accelerating curve. The final 30 days before expiry see the steepest erosion.

Time value across moneyness:

• ATM options: Highest absolute time value, the most extrinsic value to harvest or lose
• Deep ITM options: Very little time value, their price is mostly intrinsic
• Far OTM options: Low absolute time value, little extrinsic value remaining

The decay curve: A 90-day ATM option loses time value slowly at first, then rapidly in the final 30 days. This convex decay curve is why premium sellers often close positions at 50% profit around 21 DTE, capturing the early, slow decay and exiting before the whippy late-stage gamma risk.

Time value and implied volatility: High IV inflates time value. More expected movement means the market pays more for the possibility of the option becoming valuable. When IV collapses (IV crush), time value falls rapidly even without the passage of actual calendar time.

Example: A 60-day ATM call on SPY has $9.00 of time value. With 10 days left, that same call has $2.50 of time value, the other $6.50 has decayed away, representing profit for anyone who sold it at the start.

Related terms: Extrinsic value, theta, ATM, premium, 0DTE, IV crush

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