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Time Value

# Time Value

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04/22/2014

Time Value
S
imply stated, time value is equal to the total premium less the intrinsic value.Time value—sometimes called extrinsic value— reflects the amount of moneybuyers are willing to pay in expectation that an option will be worth exercising ator before expiration.

-

5

11

6.30

11

6.50
CALL

12

OTM
，因此，没有任何内在价值。即便如此，期权的时间价值
12
Why? Because the option still has five months to go before it expiresin October, and, during that time, you hope that the underlyingfutures price will rise above the \$6.50 strike price. If it were toclimb above \$6.62 (strike price of \$6.50 + \$.12 premium), the holderof the option would realize a profit.由于期权仍然在
10

5

6.50

6.62

6.50

+ 0.12

question is why 12 cents? Why not 10 cents? Or 30 cents? In otherwords, what are the factors that influence an option’s time value? 换句话说，什么因素影响了期权的时间价While interest rates and therelationship between the underlying futures price and the optionstrike price affect time value, the two primary factors affectingtime value are:
1. The length of time remaining until expiration.2. The volatility of the underlying futures price.Length of Time Remaining Until Expiration
All else remaining equal, the more time an option has untilexpiration, the higher its premium. Time value is usually expressedin the number of days until expiration. This is because it has moretime to increase in value (to employ an analogy, it’s safer to sayit will rain within the next five days than to say it will rainwithin the next two days). Again, assuming all else remains the same,an option’s time value will decline (erode) as the option approachesexpiration. This is why options are sometimes described as “decayingassets.” As the above chart shows, an option at expiration will havezero time value (its only value, if any, will be its intrinsicvalue). 其他条件保持不变，期权到期前的时间越多，费用越高时间价值通常用到期前的天数来表示。这是因为有更多的时间增加价值。（类似的，说未来5天内将下雨比未来2天内下雨安全）。再次假设所有的保持不变，当期权接近到期日时，期权的时间价值会减少（侵蚀）这就是为什么期权有时被形容成“腐烂的资产”。如上图所示，期权在到期日的时间价值将0.（其唯一的价值，如果有的话，将时其内在的价值）Also note that the rate of decay increases as you approachexpiration. In other words, as the option approaches expiration, theoption buyer loses a larger amount of time value each day. Therefore,hedgers, who buy options, may want to consider offsetting their long

option position prior to the heavy time value decay and replace itwith another risk management position in the cash, futures or optionmarket.当你接近到期日时要注意侵蚀增长率，期权的购买者每天损失的时间价值越来越大。因此，保值者，购买期权的人，在时间价值严重衰减之前可能会想要抵消他
long option position。

V
olatility of the Underlying Futures
P
rice
All else remaining the same, option premiums are generally higherduring periods when the underlying futures prices are volatile. Thereis more price risk involved with market volatility and therefore agreater need for price protection. The cost of the price insuranceassociated with options is greater, and thus the premiums will behigher.
G
iven that an option may increase in value when futuresprices are more volatile, buyers will be willing to pay more for theoption. And, because an option is more likely to become worthwhile toexercise when prices are volatile, sellers require higher premiums.Thus, an option with
9
0 days to expiration might command a higherpremium in a volatile market than an option with 120 days toexpiration in a stable market.
Other Factors Affecting Time
V
alue
Option premiums also are influenced by the relationship between theunderlying futures price and the option strike price. All else beingequal (such as volatility and length of time to expiration), an at-the-money option will have more time value than an out-of-the-moneyoption. For example, assume the soybean oil futures price is 2
4
centsper pound. A call with a 2
4
-cent strike price (an at-the-money call)will command a higher premium than an otherwise identical call with a26-cent strike price. Buyers, for instance, might be willing to pay 2cents for the at-the-money call, but only 1.5 cents for the out-of-the-money call. The reason is that the at-the-money call stands amuch better chance of eventually moving in the money.An at-the-money option is also likely to have more time value than anoption that is substantially in the money (referred to as a deep in-the-money option). One of the attractions of trading options is“leverage”—the ability to control relatively large resources witha relatively small investment. An option will not trade for less thanits intrinsic value, so when an option is in-the-money, buyersgenerally will have to pay over and above its intrinsic value for theoption rights. A deep in-the-money option requires a greaterinvestment and compromises the leverage associated with the option.