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SIE practice questionmediumOptions — Time Value

Which of the following factors increases the time value of an option?

  1. ALess time remaining until expiration
  2. BLower volatility of the underlying security
  3. CGreater time remaining until expiration and higher volatility of the underlying security✓ Correct answer
  4. DThe option being deep in-the-money
Explanation

Why C — Greater time remaining until expiration and higher volatility of the underlying security

Time value is greatest when there is more time until expiration (more opportunity for favorable price movement) and when the underlying security is more volatile (greater chance of significant price movement). Time value decays as expiration approaches (time decay/theta). Deep ITM options have less time value relative to their total premium because most of their value is intrinsic.

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