Time Value Premium: What is it?

8

8digits

I am a bit confused on what time value premium is. I believe I understand what Intrinsic Value is. If I am correct, Intrinsic value is just the stock price minus the strike price. Which means: the amount of money I've collect in profits if I did not have to pay a premium. Is this correct? However, what has me confused is Time Value. Together, Time value and Intrinsic value make up the option price. I get that. But, what exactly is time value? If intrinsic value is the amount of profit I'd make without the premium, is the time value premium just the up charge a writer of the contract is charging?
 
ITM options have intrinsic value. OTM options do not have intrinsic value, only time value.

The "time premium" has some value. It's the value (price) for having the option available for "___ amount of time".

If it's still not clear, compare the notion of time premium to the purchase of an option to buy land. Let's say you might want to buy a piece of property that has a price of $250,000... but you're not ready to do so right now. But you want to "tie up" that property so that somebody else doesn't buy it while you're getting your house in order, so you pay the owner of the land an "option premium" of say $5,000... the option grants you the right to purchase the land for $250K any time within the next 12 months. That "time" where the land is off the market and is available to only you (and at the specified price) if you care to exercise it, is the value of the option.
 
yes, and it depends on volatility of the stock or at least future volatiity as it is being seen by the players in the market.
 
If you want to make it in this business you have to put some real effort in..

https://www.valuepenguin.com/investing/understanding-intrinsic-value-time-value



8digits said:
I am a bit confused on what time value premium is. I believe I understand what Intrinsic Value is. If I am correct, Intrinsic value is just the stock price minus the strike price. Which means: the amount of money I've collect in profits if I did not have to pay a premium. Is this correct? However, what has me confused is Time Value. Together, Time value and Intrinsic value make up the option price. I get that. But, what exactly is time value? If intrinsic value is the amount of profit I'd make without the premium, is the time value premium just the up charge a writer of the contract is charging?
More...
 
Scataphagos said:
ITM options have intrinsic value. OTM options do not have intrinsic value, only time value.

The "time premium" has some value. It's the value (price) for having the option available for "___ amount of time".

If it's still not clear, compare the notion of time premium to the purchase of an option to buy land. Let's say you might want to buy a piece of property that has a price of $250,000... but you're not ready to do so right now. But you want to "tie up" that property so that somebody else doesn't buy it while you're getting your house in order, so you pay the owner of the land an "option premium" of say $5,000... the option grants you the right to purchase the land for $250K any time within the next 12 months. That "time" where the land is off the market and is available to only you (and at the specified price) if you care to exercise it, is the value of the option.
More...


Thank you, this helped me understand it a lot better. I tried looking into one of the books i read for options and I tried multiple search phrases on google.I found and read up on lots of information; but, none that answered my questions like this. Thank you for the comparison.
 
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