Time value of an option

Similar financial terms

Turnaround time
Time available or needed to effect a turnaround.

Times-interest-earned ratio
Earnings before interest and tax, divided by interest payments.

Time value of money
The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

Time to maturity
The time remaining until a financial contract expires. Also called time until expiration.

Time until expiration
The time remaining until a financial contract expires. Also called time to maturity.

Time premium
Also called time value, the amount by which the option price exceeds its intrinsic value. The value of an option beyond its current exercise value representing the optionholder's control until expiration, the risk of the underlying asset, and the riskless return.

Time draft
Demand for payment at a stated future date.

Time deposit
Interest-bearing deposit at a savings institution that has a specific maturity.

Real time
A real time stock or bond quote is one that states a security's most recent offer to sell or bid (buy). A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Market timer
A money manager who assumes he or she can forecast when the stock market will go up and down.

Cash flow time-line
Line depicting the operating activities and cash flows for a firm over a particular period.

Just-in-time
Just-in-time production is a system in which materials, parts and finished products are delivered at the precise time they are needed. This encourages lower stock holdings, shorter lead times, quicker supply chains, better customer contact and relations, greater efficiency and a more profit-focused organisation.

Principal value
The amount that the issuer of a bond agrees to repay the bondholder at the maturity date. The principal is also referred to redemption value, maturity value, par value or face value.

Back-end value
The amount paid to remaining shareholders in the second stage of a two-tier or partial tender offer.

Going-concern value
The value of a company as a whole over and above the sum of the values of each of its parts; the value of organization learning and reputation.

Terminal value
The value at maturity.

Book value per share
The intrinsic value of a company's stock. BVPS is calculated by dividing tangible capital dollar value by the number of outstanding shares of common stock.

Face value
Alternative name for par value.

Adjusted present value (APV)
The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leverage buy-out.

Value manager
A manager who seeks to buy stocks that are at a discount to their "fair value" and sell them at or in excess of that value. Often a value stock is one with a low price to book value ratio.

Value dating
Refers to when value or credit is given for funds transferred between banks.

Value date
In the market for eurodollar deposits and foreign exchange, value date refers to the delivery date of funds traded. Normally it is on spot transactions two days after a transaction is agreed upon and the future date in the case of a forward foreign exchange trade.

Value additivity principal
Prevails when the value of a whole group of assets exactly equals the sum of the values of the individual assets that make up the group of assets. Stated differently, the principle that the net present value of a set of independent projects is just the sum of the net present values of the individual projects.

Value-at-Risk
A value-at-risk (VAR) model is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Value-added tax
Value-added tax (VAT) is a method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage.

Utility value
The welfare a given investor assigns to an investment with a particular return and risk.

Straight value
Also called investment value, the value of a convertible security without the con-version option.

Standardized value
Also called the normal deviate, the distance of one data point from the mean, divided by the standard deviation of the distribution.

Salvage value
Scrap value of plant and equipment.

Residual value
Usually refers to the value of a lessor's property at the time the lease expires.

Replacement value
Current cost of replacing the firm's assets.

Relative value
The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another.

Price value of a basis point (PVBP)
Also called the dollar value of a basis point, a measure of the change in the price of the bond if the required yield changes by one basis point.

Present value of growth opportunities (PVGO)
The net present value (NPV) of investments the firm is expected to make in the future.

Present value factor
Factor used to calculate an estimate of the present value of an amount to be received in a future period.

Present value
The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future.

Par value
Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.

Original face value
The principal amount of the mortgage as of its issue date.

Net salvage value
The after-tax net cash flow for terminating the project.

Net present value rule
An investment is worth making if it has a positive NPV. Projects with negative NPVs should be rejected.

Net present value of future investments
The present value of the total sum of NPVs expected to result from all of the firm's future investments.

Net present value of growth opportunities
A model valuing a firm in which net present value of new investment opportunities is explicitly examined.

Net present value (NPV)
The present value of the expected future cash flows minus the cost.

Net book value
The current book value of an asset or liability; that is, its original book value net of any accounting adjustments such as depreciation.

Net asset value (NAV)
The value of a fund's investments. For a mutual fund, the net asset value per share usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed end fund, the market price may vary significantly from the net asset value.

Net adjusted present value
The adjusted present value minus the initial cost of an investment.

Market value-weighted index
An index of a group of securities computed by calculating a weighted average of the returns on each security in the index, with the weights proportional to outstanding market value.

Market value ratios
Ratios that relate the market price of the firm's common stock to selected financial statement items.

Market value
(a) The price at which a security is trading and could presumably be purchased or sold. (b) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.

Loan value
The amount a policyholder may borrow against a whole life insurance policy at the interest rate specified in the policy.

Liquidation value
Net amount that could be realized by selling the assets of a firm after paying the debt.

Bond value
With respect to convertible bonds, the value the security would have if it were not convertible apart from the conversion option.

Book value
A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value.

Cash-surrender value
An amount the insurance company will pay if the policyholder ends a whole life insurance policy.

Conversion value
Also called parity value, the value of a convertible security if it is converted immediately.

Embedded value
A methodology that reflects future shareholder profits in the life insurance business. Embedded value equals the free surplus plus the value of inforce business. Embedded value is hard to compare with different companies since each company determines its own input parameters, for example the level of target surplus.

Salvage Value
Is the amount remaining after a depreciated useful life. It refers to the residual or recoverable value of a depreciated asset. It should be noted that the gross salvage value may be adjusted by a removal or disposal cost. This adjustment would lower the gross salvage value.

Extrinsic Value
The time value component of an option premium.

Up-and-Out Option
An option that ceases to exist when the price of the underlying asset increases to a set level.

Up-and-In Option
An option that comes into existence when the price of the underlying asset increases to a set level.

Synthetic Option
A synthetic is an option created by trading the underlying asset.

Swing Option
A swing option are found in the energy market. Its value depends on the consumption of energy, which must be between a minimum and maximum level. There is usually a limit on the number of times the option holder can change the rate at which the energy is consumed.

Static options replication
A static options replication is a procedure for hedging a portfolio that involves finding another portfolio of approximately equal value on some boundrary.

Spread option
AN option where the payoff depends on the difference between two market variables.

Exotic option
A non-standardized option

Real option
An option involving real (as opposed to financial) assets where. Real assets include land. plant, and machinery.

Option class
All options of the same type (call or put) on a particular stock.

Abandonment option
The option of terminating an investment earlier than originally planned.

Yield curve option-pricing models
Models that can incorporate different volatility assumptions along the yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

Wild card option
The right of the seller of a Treasury Bond futures contract to give notice of intent to deliver at or before 8:00 p.m. Chicago time after the closing of the exchange (3:15 p.m. Chicago time) when the futures settlement price has been fixed.

American option
An option that may be exercised at any time up to and including the expiration date.

American-style option
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.

Virtual currency option
An option contract introduced by the PHLX in 1994 that is settled in US$ rather than in the underlying currency. These options are also called 3-Ds (dollar denominated delivery).

Two-state option pricing model
An option pricing model in which the underlying asset can take on only two possible (discrete) values in the next time period for each value it can take on in the preceding time period. Also called the binomial option pricing model.

Timing option
For a Treasury Bond or note futures contract, the seller's choice of when in the delivery month to deliver.

Tax-timing option
The option to sell an asset and claim a loss for tax purposes or not to sell the asset and defer the capital gains tax.

Tax deferral option
The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is payable only when the gain is realized by selling the asset.

Stock option
An option in which the underlying is the common stock of a corporation.

Stock index option
An option in which the underlying is a common stock index.

Split-fee option
An option on an option. The buyer generally executes the split fee with first an initial fee, with a window period at the end of which upon payment of a second fee the original terms of the option may be extended to a later predetermined final notification date.

Quality option
Also called the swap option, the seller's choice of deliverables in Treasury Bond and Treasury note futures contract.

Put option
This security gives investors the right to sell (or put) fixed number of shares at a fixed price within a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment.

Put an option
To exercise a put option.

Postponement option
The option of postponing a project without eliminating the possibility of undertaking it.

Path dependent option
An option whose value depends on the sequence of prices of the underlying asset rather than just the final price of the asset.

Out-of-the-money option
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Options on physicals
Interest rate options written on fixed-income securities, as opposed to those written on interest rate futures contracts.

Options contract multiple
A constant, set at $100, which when multiplied by the cash index value gives the dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash index value x $100 (the options contract multiple).

Options contract
A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period, or on a specified date (expiration date).

Option-adjusted spread (OAS)
(a) The spread over an issuer's spot rate curve, developed as a measure of the yield spread that can be used to convert dollar differences between theoretical value and market price. (b) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the base yield spread of an MBS without an operative call produces the option-adjusted spread.

Option writer
An option writer is the option seller.

Option seller
Also called the option writer , the party who grants a right to trade a security at a given price in the future.

Option price
Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future.

Option premium
The option price.

Option not to deliver
In the mortgage pipeline, an additional hedge placed in tandem with the forward or substitute sale.

Option elasticity
The percentage increase in an option's value given a 1% change in the value of the underlying security.

Option
Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be worth more than the price set by the option (the strike price), plus the price they paid for the option itself. Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of a class of securities called derivatives, so named beca ...

Naked option strategies
An unhedged strategy making exclusive use of one of the following: Long call strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying put options ), and short put strategy (selling or writing put options). By themselves, these positions are called naked strategies because they do not involve an offsetting or risk-reducing position in another option or the underlying security.

Multi-option financing facility
A syndicated confirmed credit line with attached options.

Margin requirement (Options)
The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.

Lookback option
An option that allows the buyer to choose as the option strike price any price of the underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.

Liquid yield option note (LYON)
Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Knock-in option
An option that begins to function as a normal option ("knocks in") once a certain price level is reached before expiration. Might not knock in at all.

Knock-out option
An option with a built in mechanism to expire worthless should a specified price level be exceeded.

Bargain-purchase-price option
Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.

Barrier options
Contracts with trigger points that, when crossed, automatically generate buying or selling of other options. These are very exotic options.

Basket options
Packages that involve the exchange of more than two currencies against a base currency at expiration. The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of exchange. A basket option is generally used by multinational corporations with multicurrency cash flows since it is generally cheaper to buy an option on a basket of currencies than to buy ...

Binomial option pricing model
An option pricing model in which the underlying asset can take on only two possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Call an option
To exercise a call option.

Call option
An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.

Chicago Board Options Exchange (CBOE)
A securities exchange created in the early 1970s for the public trading of standardized option contracts.

Compound option
Option on an option.

Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying.

Currency option
An option to buy or sell a foreign currency.

Dealer options
Over-the-counter options, such as those offered by government and mortgage-backed securities dealers.

Ho-Lee Option Model
An arbitrage free model which uses an estimated spot curve to evaluate embedded options in credit or fixed income securities.

London Option
A generic term sometimes used to describe options on physical commodities or on futures contracts traded abroad (typified by options on London commodity markets). These options, which often had nothing whatsoever to do with legitimate foreign markets, gained notoriety--prior to their ban in the United States in 1978--because of the sales practices and fraud allegations associated with the American dealers who sold them.

Seller's Option
The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.

Transferable Option
A contract which permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.