The time value of the option can best be defined as
A) the commission earned by a broker.
B) the fee earned for the potential benefits from buying the option.
C) the service fee charged by the SEC for regulating the option market.
D) the fee paid for the potential benefits from buying an option (excluding its intrinsic value).

Question

Quizplus · Accepted Answer

The time value of an option is the price paid for the potential benefits of owning it, excluding its intrinsic value (the difference between the strike price and the current market price of the underlying asset, if applicable). This time value represents the likelihood that the option will increase in value before its expiration date, based on factors such as the volatility of the underlying asset, the time remaining until expiration, and the prevailing interest rates.

The Time Value of the Option Can Best Be Defined