Time Value

Time value is the remainder of an option’s premium after subtracting any intrinsic value. The premium associated with time value is determined by a few key factors: time remaining until expiration of the option contract, volatility of the underlying futures contract, and the cost of money (interest rates). The more time until the option expires, the more premium the seller will require. The higher the volatility of the underlying futures contract would also lead to increased premiums as uncertainty of whether the option will have intrinsic value at expiration is elevated. Similarly, lower the volatility equates to lower the premiums.