Time value premium of options

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By aaron

Time value premium - The amount by which the option value exceeds the intrinsic value.

Example: A call option with a $50 strike price and stock price is $55. The option is trading at $8. Intrinsic value here is only $5, so the other $3 can be attributed to time value premium.

An option usually has the highest time value when the stock price equals the strike price. As the option goes deeper in the money, intrinsic value increases and time value decreases.

For deep in the money options, an option might actually trade at a negative time value. That is, they could trade below intrinsic value because investors are more interested in options closer to the money that might see bigger moves.

#investing #options #stocks

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