Time value is also termed as premium over parity. The time value of an option is the difference between the premium of the option and the intrinsic value of the option. For, a call or a put option, which is at-the-money or out-of-the-money, the entire premium about is the time value. For an in-the-money option time value may or may not exist. In case, of a call which is in-the-money, the time value exists if the call price, C, is greater than the intrinsic value, S – E. Generally, other things being equal, the longer the time of a call to maturity, the greater will be the time value.
This is also true for the put options. An in-the-money put option has a time value if its premium exceeds the intrinsic value, E – S. Like for call options, put options, which are at-the-money or out-of-the-money, have their entire premium as the time value. Accordingly,
Time value of a call = C – [max (0, S – E)]
Time value of a put = C – [max (0, E – S)]
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