Time value reflects any additional amount that buyers are willing to pay in the hope that changes in the underlying futures price prior to expiration will increase the option's intrinsic value. The time value of an option declines as time passes since there is less and less time remaining for the option to develop intrinsic value. This is equivalent to the option's value at exercise. Any time an option premium is less than the option's intrinsic value, an arbitrageur will buy the option, exercise it, and then offset the resulting futures position at a profit, assuming he can cover transaction costs. At the end of each trading day, all option transactions are accepted and cleared by the Clearing Association, assuring performance on all contract obligations, and freeing buyers and sellers of any further direct obligations to each other.
Many investors find the benefits of purchasing options highly attractive.
Chief among these benefits are leverage, limited price risk, and staying power. Premiums used in the examples are for illustrative purposes only. Because of limited risk, purchasing options offers an investor what is known as staying power, or the ability to hold onto a losing position in the face of a market reversal without calling for additional funds in the form of margin. Finally, futures options are traded on the Exchange where there is a readily available re-sale market, so an investor can always trade out of an option position if he chooses to do so prior to expiration. This last point is particularly important.