Editing Option time value (section)

In [[finance]], the '''time value''' ('''TV''') (''extrinsic'' or ''instrumental'' value) of an [[option (finance)|option]] is the premium a rational investor would pay over its ''current'' exercise value ([[intrinsic value (finance)|intrinsic value]]), based on the probability it will increase in value before expiry. For an [[Option style|American option]] this value is always greater than zero in a fair market, thus an option is ''always'' worth more than its current exercise value.<ref>Note, however, that there is also a cost component of holding an option (or any asset), based on the [[time value of money]].</ref> As an option can be thought of as 'price insurance' (e.g., an airline insuring against unexpected soaring fuel costs caused by a hurricane), TV can be thought of as the ''risk premium'' the option seller charges the buyer—the higher the expected risk (volatility <math>\cdot</math> time), the higher the premium. Conversely, TV can be thought of as the price an investor is willing to pay for potential upside.

Time value decays to zero at expiration, with a general rule that it will lose {{frac|1|3}} of its value during the first half of its life and {{frac|2|3}} in the second half.<ref>{{cite web |title=Options Theta |url=https://warsoption.com/basics/option-greeks/option-theta/ |website=Warsoption |access-date=9 March 2021}}</ref> As an option moves closer to expiry, moving its price requires an increasingly larger move in the price of the underlying security.<ref>[http://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp  ''Understanding Option Pricing ''] Hans Wagner</ref>