CAN YOU PLEASE EXPLAIN THE CALCULATION OF TIME VALUE? - ProProfs Discuss
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Can you please explain the calculation of time value?



Asked by Merlin, Last updated: Sep 19, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Time value is simply the amount of value one places on time. the more time to expiry,the greater the possibility that the option can move into a profitable position and thehigher the value investors will place on time.in the text you are asked to assume that the strike price is 50, the call option premiumis $4.55, the time value is $2.05 and the intrinsic value is $2.50.based on this information, you can assume that the price of the underlying stock mustbe $52.50.heres why:option price = intrinsic value + time value$4.55 = $2.50 + $2.05intrinsic value occurs when the option is in the money. for call options, to determinethe intrinsic value, you subtract the strike price form the market price of the stock:market price - $50 = $2.50market price = $52.50
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