When the option taker and the option writer agree on a price for the option contract, the trade takes place. Intrinsic value Intrinsic value is the difference between the exercise price of the option and the market price of the underlying shares at any given time. Time to expiry - the longer the time to expiry, the greater the time value of the option.
Time value declines as the expiry of the option draws closer.
This erosion of time value is called time decay. It is not constant, but increases rapidly towards expiry. Volatility - in general, the greater the volatility of the underlying asset, the greater the time value will be. This is due to the fact that the writer is exposed to a greater probability of incurring a loss, and will require higher premium income to compensate for the increased risk. More on volatility .