Basics

Time Value and Greeks explained simply

The price of an option is not only about direction. One part is intrinsic value, one part is time value. The Greeks show how sensitive that price is to market, time, and volatility.

Price logic

Intrinsic value plus time value

The option price = intrinsic value + time value. Time value gets smaller as the option moves closer to expiration. This is reflected by the theta value.

Example: A call option costs 8 EUR, spot is 105 EUR, and strike is 100 EUR. Then 5 EUR is intrinsic value and 3 EUR is time value.

The split in compact form

  • Spot 105 minus strike 100 = 5 EUR intrinsic value
  • Premium 8 EUR minus intrinsic value 5 EUR = 3 EUR time value

8 EUR option price = 5 EUR + 3 EUR

5 EURIntrinsic value3 EURTime value
Long call: spot 105 EUR, strike 100 EUR. Intrinsic value = max(105 − 100, 0). Time value = 8 − 5. Bar widths match the components of the option price.

The key Greeks make these price moves easier to read:

  • Delta How much does the option move when the underlying moves?
  • Theta How much time value does the option lose per day?

    Time value declines; daily decay accelerates

    Time value declines; daily decay acceleratesThe line shows the result along the labelled price axis. Assumptions and legs are listed below.Remaining time value (EUR)070306090Elapsed days → expiry
    90 DTE: 5.94 EUR30 DTE: 3.43 EUR0 DTE: 0 EUR
    • ATM time value
    Model of an option held at ATM: spot = strike = 100 EUR, IV 30%, starting at 90 DTE; zero rates and dividends. This curve shows remaining time value, not theta itself. Theta is the daily change: about −0.02 EUR at 90 DTE and −0.06 EUR at 10 DTE. Price and IV changes alter the actual path.

    Time decay depends strongly on moneyness: ATM options usually lose time value fastest near expiration. ITM options also contain intrinsic value, so their time decay is often less pronounced and more linear. OTM options consist only of time value; that value goes to zero by expiration, but the final decay is often less steep than with ATM options.

  • Gamma How much does delta itself change?
  • Vega How much does price react to changing IV?

Sources: DeltaValue, Extrinsic value, DeltaValue, Option Greeks, LYNX, Option Greeks, LYNX, Theta