“After an ATM stock option”s underlying climbs $14, the option is valued at $18. Therefore, the time value of $4 ($18 – $14) is 22% of the option”s total value ($4/$18).

Granted, this hides the fact that someone, somewhere, needs to “calculate” the remaining “time value”. But I think an average reader doesn”t see it that way. The more simple concept “TimeValue = OptionValue – IntrinsicValue” is an easier step (think Wittgenstein”s Ladder) to get to the idea of “TimeValue/OptionValue < 30%".

To be pedantic, you could then reference something about the *actual* process of determining the TimeValue.

And thank you for this article. Very informative!

]]>The most well-known option model is Black-Scholes, which is readily available on the Internet. The factors that go into the model are the option’s time to expiration and the risk-free interest rate for that duration, the volatility measurement of the underlying stock’s price, and the relationship of the option’s exercise price to the current price of the stock. Companies that issue options will typically discuss in their annual reports or 10-k’s the factors they used to calculate the time value of their outstanding options. ]]>