Also known as extrinsic or instrumental value, it is the portion left of the option value (the price) when its intrinsic value is taken out. The option value is composed of two components: intrinsic value and time value. This value can be found using Black – Scholes formula or numerical methods (such as the binomial model). Per se, the time value, can be determined by the remaining lifespan of the option before it expires (and gets worthless), price volatility and interest rates (cost of refinancing the underlying asset).
In other words, the option time value represents the portion of the premium that is determined by the time remaining until the expiration date of the option contract.
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