It is like an insurance premium of the option; the higher the risk, the higher the premium to buy the option.
We discussed already that the value of option is the sum of intrinsic value and time value.
Keeping other things remain constant, the time-value of an option is affected by both for Call & Put Options: Time remaining until expiration: The longer the time to expiration, the more time value the option will have and vice versa.
The proximity of the Strike Price to the money.
At-The-Money options have the highest of time value as it has higher potential for intrinsic value increases the greatest at this point, and the time value decreases as the intrinsic value moves to deeper In-The-Money Options and deeper Out-Of-The-Money options.
An option will not command a high time value if it is far Out-Of-The-Money as it has got almost no chance of ending-up In-The-Money.
On the other hand if an option has deep In-The-Money will have a smaller value as it is more likely that it will finish In-The-Money.
However, options will have a higher time value when they are At-The-Money as they have more uncertainty of finishing In-The-Money.
For both Call and Put options, the time value of an option decreases as expiration is nearing, and it decreases at an increasing rate as it is getting closer to expiration.
This happens particularly for At-The-Money (ATM) options.
For these options, time value decreases at a faster rate particularly the last one month before expiration.
The price movement of options will be much lesser than price movement of their underlying stock unless they are in-the-money or very close to expiration.
The time value of options will be lower where stock price is not expected to move much.
The opposite holds true for more volatile stocks primarily due to the uncertainty of the price of the stock before the option expires.
In general, an option loses almost a third of its value during the first half of its life and two-thirds during the second half of its life.