The option premium or option price can be broken down into two component parts, which are referred to as the intrinsic value and the time value of the option. The intrinsic value refers to the gain that would be made if the option could be exercised today. If the option is in-the-money, which means that, for a call option, the underlying stock price is higher than the strike price on the option, we will have intrinsic value on the option. We would make a gain if we could exercise the option today. However, if the option is out-of-the-money, and it would be abandoned if we were at the maturity date today, there is zero intrinsic value. So intrinsic value can never be negative. Time value makes up the remainder of the options value. Time value is driven by the fact that there is time left until the maturity of the option, and within that time left, things might get better. There might be more intrinsic value for us or some intrinsic value if the option is currently out-of-the-money. So there is still hope that things could get better up until the expiration of the option. Time value tends to be highest for options which are at-the-money where the underlying stock price is very close to the exercise price, and as you move forward through time, there is less time left for things to get better. So generally, time value declines as you move forward through time.

Factors that influence time value include, as we've just mentioned, the time to expiration, and as we have less time left to expiration, there's less time for things to get better and therefore lower time value. The volatility of the underlying stock does have an influence as well. If there's a greater likelihood that there's going to be significant movement in the underlying asset price, there's a greater chance that things get better before expiration, so therefore, we'll have higher time value. The relationship between the underlying stock price and the strike price of the option has an impact on time value. As we said previously, time value is highest at-the-money. If an option is very far in-the-money or very far out-of-the-money, time value tends to be very low. And finally, interest rates also have an influence on time value.