How to Calculate Option Time Value?

[vickymaj]

Hi Guys,

Is there an approximate way by which I can find out the Time Value of an Option Premium?

So for any Option, Premium = Intrinsic Value+ Time Value

I want to approximate the time value without actually calculating the Premium using Black Scholes or some other Model. How can I approximate it, if I have a Vol estimate and other inputs necessary?

 

[financeguy]

Hi Guys,

Is there an approximate way by which I can find out the Time Value of an Option Premium?

So for any Option, Premium = Intrinsic Value+ Time Value

I want to approximate the time value without actually calculating the Premium using Black Scholes or some other Model. How can I approximate it, if I have a Vol estimate and other inputs necessary?

Seems like no one else took this question, so I'll do it. Intrinsic value is a trivial thing, it's just the current in-the-moneyness of the option, discounted back to today. If the strike is out of the money with respect to the underlying's forward to the expiration date of the option, the intrinsic value is zero. If it is in the money, the intrinsic value is just the difference between the strike and the underlying's forward. If total premium decomposed into intrinsic value and time value, the intrinsic value is trivial to calculate. Time value is the value of optionality that we use models to explain. So unfortunately the answer is no, you can't avoid using a model to come up with the time value component of an option's total premium. If you have an estimate for the volatility of the underlying, then chuck it into the Black-Scholes formula and your price will pop out. If the option is ITM, you can do two things to decompose the premium into intrinsic value and time value. One is that you could just subtract away the moneyness of the option to get to the time value. Two is you could switch it from an ITM call to an OTM put (or vice versa), use B-S again to get a price using the same vol, and that will be your time value (since an OTM option has no intrinsic value). The difference between the price of the ITM option and the OTM option with the same strike will be equal to the intrinsic value of the ITM option. That's put-call parity, by the way.