Time Value
Chapters in this video
- 0:00 Expiration day pop quiz: time value left at 104 futures, 100 strike
- 1:21 Time value defined: premium minus intrinsic value
- 2:28 ITM, OTM, ATM: where the entire premium becomes time value
- 3:36 Time decay and the buyer's melting ice cube
- 5:12 Expiration day arithmetic: why time value is unavoidably zero
- 6:19 Time value peaks at-the-money, not deep in-the-money
- 8:08 Rapid-fire exam recap
What this video covers
- The core identity: premium equals intrinsic value plus time value, and how to rearrange it to isolate time value
- Why out-of-the-money (OTM) and at-the-money (ATM) options have intrinsic value of zero, making the entire premium time value
- How time decay erodes an option buyer's position day by day while the seller (grantor) benefits from that same erosion
- Why time value is exactly zero at expiration, so premium equals intrinsic value and no leftover premium can be added
- The melting ice cube analogy as a mental model for who holds time value (the buyer) and who roots for it to disappear (the seller)
- Why time value is greatest at-the-money (ATM), not deep in-the-money (ITM), and how the exam uses rich premiums to bait you into the wrong answer
- How to spot deep in-the-money options that are mostly intrinsic value with only a thin sliver of time value remaining
Read the full lesson, free
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