If an investor is new to trading options, this post will help them learn the importance of time value. Time Value is just as important as any other element in trading options. The premium aspects of an option are not intrinsic, which means that they are not part of the option’s ‘price’ by definition.
Time Value can also compensate for people who choose to exercise their options sooner than later, and it usually diminishes if the expiration date approaches. This article will discuss why time value is so important to option traders and how it affects your trades.
1. Options and Strike Price
According to the experts at SoFi Invest, trade options text time value is relative to strike price. The strike price determines the intrinsic value of an option, and the time value is the premium. This means that time value is only a part of an option’s payout and thus can be affected by implied volatility and investor sentiment.
Traders also have a keen interest in knowing when to exercise options when they have not yet matured. Thus, they have not yet reached their maturity or expiration date.
2. Options and Expiration
Time value increases as the expiration date approaches. The ‘time value decay’ is a normal phenomenon in any type of investment, and it does not apply only to options trading.
Trading options, therefore, have a lot to do with how they manage time value because if they can manage it well, their profits will be greater.
3. Time Value and Implied Volatility
Implied volatility can be a determinant of time value. SoFI Invest’s knowledge and expertise in trading options give them a leg up to capitalize on time value. Understanding implied volatility is critical to pricing options in any type of investment.
The time value of an option will rise in direct proportion to changes in the implied volatility. It is also worth noting that large swings in implied volatility can create huge swings in the time value.
4. Time Value and Patience
Patience is a virtue in trading options. When an option’s time value rises, it is a good indication that its premium value has also risen. Their strategy should ideally be based on patience and not on placing their bet on the first available opportunity to make a profit. Patience is the key to profiting from options trading.
5. Time Value and Call/Put Options
The simplest form of options trading is put and call options. Call options allow the owner to buy a security, while put options allow the owner to sell a security. The amount of time value(premium) depends on how close the expiration date is from now, as it does for all other types of investments.
All they need is the right kind of knowledge and skill that will help them in trading options. If they want to be a professional trader, read this article repeatedly to increase their knowledge of trading options.