Definition
Time value, also called extrinsic value, is the part of an option's premium that exceeds its intrinsic value. Intrinsic value is what the option would be worth if exercised immediately; time value is everything else the buyer pays for the possibility that the position improves before expiration.
An out-of-the-money option has no intrinsic value at all, so its entire premium is time value. The further away expiration is, and the more uncertain the outcome, the larger this component tends to be.
Why it matters
How it works
Two main forces inflate time value: the amount of time remaining and the volatility of the underlying. More time gives the stock more room to move favorably; higher volatility widens the range of plausible outcomes. Both raise the premium a buyer must pay.
Time decay is not linear — it accelerates in the final weeks before expiration. Option sellers exploit this by writing contracts and watching the time-value component shrink, while buyers must overcome this erosion through movement in the underlying.