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Time value refers to the portion of any option premium that is directly related to the amount of time remaining between the current date and the expiry date assigned to the warrant or options contract. Sometimes referred to as a time premium, the time value identifies the worth or value of the option or warrant above and beyond the intrinsic or face value assigned to the option. Calculating the time value is one tool used to assess the feasibility of purchasing a given options contract.
A projected time value is calculated at the time of purchase. This essentially provides the investor with a good idea of what to expect in the way of a return on the investment, provided the applicable market conditions remain stable. From time to time, the time value can be calculated from the current date as well. This helps the investor to track the rate of return that can be expected for any remaining period of time until expiration.
Because time value has to do with the worth of the options as they relate to current circumstances, the calculation can be a great way for investors to determine if they really want to continue to hold a given option all the way to the expiration date. If the investor finds that the options premium is not living up to expectations, then he or she may choose to not hold the option all the way to maturity. At the same time, the time value may indicate the option is performing above expectations, indicating that hanging on to the option is a smart move.
Assessing the time value of options and warrants from time to time is simply sound investment policy. The process can be used as one indicator of how to organize investments to best advantage. However, the simple calculation of time value is usually not the only factor that the investor will consider. Other indicators such as upcoming political elections, anticipated shifts that will impact the entire market, and even the potential for natural disasters may also influence the decision to hang on or sell a given options contract.
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