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.

Question

Quizplus · Accepted Answer

The time value of an option refers to the portion of the option's premium that reflects the potential for the option to increase in value before it expires. This potential for appreciation is based on the amount of time remaining until the option's expiration date, the volatility of the underlying asset, and other market factors. Therefore, the fee paid for the potential benefits from buying an option is the best definition of the time value of the option.

The Time Value of the Option Can Best Be Defined