Time Value

Time value is the part of an option's price that comes from the possibility that the option could become more profitable before it expires. It is one of the two pieces that make up an option's total price, the other being intrinsic value, which is the amount the option is already worth if you exercised it right now based on where the stock is trading.

To see time value on its own, take the option's market price and subtract its intrinsic value. Whatever is left over is time value. For example, if a call option is trading for $3.50 and its intrinsic value is $2.00, the remaining $1.50 is time value: the market is charging extra for the chance that the stock moves further in the buyer's favor before expiration.

Time value shrinks as expiration approaches, a process traders call time decay. This happens because there is less and less time left for the stock to make the move that would justify the extra price, so all else equal an option becomes cheaper day by day even if the stock price doesn't move at all. Time value is largest when there's a lot of time left until expiration and when the market expects the stock to be volatile, and it shrinks fastest in the final weeks before expiration.

The nuance that trips people up: time value and extrinsic value are used interchangeably by most traders, but "extrinsic value" is the more technically correct term because the extra price also reflects things like expected volatility, not purely the passage of time. In everyday trading conversation, though, treat them as the same thing.