Time value of Option

Posted in Finance, Accounting and Economics Terms, Total Reads: 1799

Definition: Time value of Option

The value of the option depreciates with time. Since the decay is an exponential  one, Over a 120 day period the rate of depreciation is the least during the initial 30 days and becomes the highest during the last one month. The final value of the option becomes zero.   The current price at which the stock is trading is its strike price.

Example :

Let us assume  a  Hero Honda Option having a price of 80 $

If the stock price of underlying asset is lower than the strike price of the option it goes out of money and loses on its time value. The option price set for it is 110$ for a period of 30 days. It is worthless to hold the option after its expiry and means a loss for the holder. The option cannot be sold further after its period of expiration.  The present value of the option takes into account the period of expiration  , fluctuations  and call option is usually made after accounting for various  surges the stock is experiencing. It is a common misconception that the option is supposed to be traded till its period of expiry. We can also exit after booking the profit.

Hence, this concludes the definition of Time value of Option along with its overview.

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