Question

The time value of a call option is I) the difference between the option's price and the value it would have if it were expiring immediately. II) the same as the present value of the option's expected future cash flows. III) the difference between the option's price and its expected future value. IV) different from the usual time value of money concept.

Answer 1

Answer:

I) The difference between the option's price and the value it would have if it were expiring immediately

Explanation:

Time value simply means the option's premium portion that is accountable to the amount of time remaining until the option contract expires.

These is the difference between the option's price and the value it would have if it were expiring immediately.

Time value is the premium amount that the those investing is desire to pay more than the intrinsic value.

Time value can be calculated using below formula;

Time Value = Options Premium - Intrinsic Value.

Call options helps to purchase shares of stock at a stable price until the expiration date.

The intrinsic value and the time value are the two areas of call option. These intrinsic value and time value helps to know when to buy the underlying stock.

However time value of the option increases with with the time remains untill expiration

Answer 2

Answer:

I) The difference between the option's price and the value it would have if it were expiring immediately

Explanation:

Time value in options trading simply refers to the part of an option's premium (cost or price) which is attributed to the amount of the time remaining until expiration.

An addition of the option's time value and intrinsic value equals the total premium of an option.

Therefore, we can mathematically state that:

Time Value = Option Premuim(Price) - Intrinsic Value.

The Option Premuim is an amount of money known as the price or cost.

In an exchange for the right granted by the option, an option buyer pays for the premium to an option seller.

Generally, it is seen that the more time that remains until the expiration, the greater the time value of the option. This happens as a result of investors willing to pay a higher premium for more time since the longer time taken to execute contract will be profitable due to a favorable move in the underlying asset.

Also, the lesser time remaining on an option will result in lesser willingness of investors to pay because the probability for profitability is slim.