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Annualized Time Value

The time value of the option divided by the strike price, then annualized. You can use annualized time value to develop an intuitive understanding of how much value the option market is adding to an in-the-money option beyond the intrinsic value.

For example, if a stock is trading at $40 and a six month call on that stock with a strike price of $35 has an intrinsic value of $5 and a total value of $7, the time value ($2) divided by the strike is ($2/$40) = 5%. Annualizing that time value to a one year horizon on a continuously compounded basis yields 9.76% (2 times ln(1 + 0.05)).

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