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Fanda Yang
Fanda Yang
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If you look at the definition of time value on Wikipedia, you may notice this line: Time value "can be thought of as the price an investor is willing to pay for potential upside."

https://en.wikipedia.org/wiki/Option_time_value

You are right to think that the time value is increasing as the moneyness increases from deeply OTM to ATM. Once the moneyness crosses the strike price threshold, per wiki's interpretation, the upside potential decreases as the underlying price moves away from the strike price. Think it as if an option is already deep in the money, the chance of it getting further ITM is slim. Hence the willingness to pay for that chance (aka. the upside potential) decreases.

If you look at the definition of time value on Wikipedia, you may notice this line: Time value "can be thought of as the price an investor is willing to pay for potential upside."

https://en.wikipedia.org/wiki/Option_time_value

You are right to think that the time value is increasing as the moneyness increases from deeply OTM to ATM. Once the moneyness crosses the strike price threshold, per wiki's interpretation, the upside potential decreases as the underlying price moves away from the strike price. Hence the willingness to pay for the upside potential decreases.

If you look at the definition of time value on Wikipedia, you may notice this line: Time value "can be thought of as the price an investor is willing to pay for potential upside."

https://en.wikipedia.org/wiki/Option_time_value

You are right to think that the time value is increasing as the moneyness increases from deeply OTM to ATM. Once the moneyness crosses the strike price threshold, per wiki's interpretation, the upside potential decreases as the underlying price moves away from the strike price. Think it as if an option is already deep in the money, the chance of it getting further ITM is slim. Hence the willingness to pay for that chance (aka. the upside potential) decreases.

Source Link
Fanda Yang
Fanda Yang
  • 11
  • 3

If you look at the definition of time value on Wikipedia, you may notice this line: Time value "can be thought of as the price an investor is willing to pay for potential upside."

https://en.wikipedia.org/wiki/Option_time_value

You are right to think that the time value is increasing as the moneyness increases from deeply OTM to ATM. Once the moneyness crosses the strike price threshold, per wiki's interpretation, the upside potential decreases as the underlying price moves away from the strike price. Hence the willingness to pay for the upside potential decreases.