Time Value Calculators And T-value Chart Are Useful Tools

By Author: Andrew Johnson
Total Articles: 18
Comment this article

Time value is the sum a person is agreeable to shell out for the ambiguity that an option will total in-the-money, or ITM when referring to option pricing. The higher an option's time value when the more of likelihood the option will not finish ITM. However, the time value will be much lower, if the probability of the option finishing ITM is almost definite, and even expected. Time value calculators are a handy tool while calculating time value.

Affecting this level of uncertainty are three specific factors and it affects both the option pricing and the time value. How these three factors affect option pricing and time value has been discussed in the following. The factors that affect this value can directly affect the pricing of your option; therefore time value is one of the main factors that influence the price of options. One can keep a track on time value by making use of time value calculators. Three factors that have an effect on time value are:

Implied Volatility- The time value of the option will be much lower when the implied volatility of an option, or IV, is low. If it was higher, the same logic would ...
... be used it. Why is this, though? IV fluctuates much more, in either direction when it is high, than it does when it is low. This means, to the underlying price of the option we expect there to be more fluctuations and more remarkable changes. For this reason, if a high IV will allow the option to complete ITM we can't be certain, therefore it has a higher time value. The time value of the option will be much lower when the implied volatility of an option, or IV, is low. Time value calculators make all such calculation simpler.

Degree of Options Moneyness- The link between the current price of a stock and the option's strike price describes the term Options Moneyness. The value will be higher if the prices are the same and at-the-money, or ATM. the chance of it finishing ITM is much higher, so the value will be lower, if the strike price of the option declines and move toward in-the-money (ITM) or out-of-the-money (OTM). Remember, because there generally is more of a chance they will have the time and ability necessary to change when they are in this state, unlike when they are OTM or ITM, the value of time is always higher for options when they are ATM. T-value chart gives you a cleaner picture about the options.

The Amount of Time until Expiration- the time value of that option will be much higher, if there is a significant amount of time remaining until the option's expiration. However, the value will be lower if the option's expiration date is close. This is since the longer period of time permits the price of the option to vary more; giving it a larger ambiguity it will finish ITM. The option has less time for change, and unexpected occurrences aren't as likely, as the option approaches its expiration date. This means the value sill most likely decrease.

It makes sense that the factors that drive the value can directly affect the price of an option as Time value is one of the main factors that drives option pricing. Make sure to look at the time value of the option, if you are trying to determine the best option price.

If you need a cost effective alternative to spreadsheets then you should try out t-value chart. Reduce your financial risk, manage your foreign exchange, and manage your interest rate risks is easy with t-value chart.

About Author:

Andrew Johnson is the author of this article. He has worked extensively in developing various software on amortization, time value and loan calculations. Through his articles, he is guiding on how time value calculators and time value in excel has made mortgage-related intricate mortgage calculations easy. For more information on t-value chart and tvalue calculator, you can also visit www.winamortpro.com.