How does time to expiry of an option impact the value of an option? For example, if we shift from a 1 month option to a 2 month option, what is likely to be the impact on the value of the option? Let us look at the table below to understand the cause-effect relationship.

Inputs

Inputs

Stock Price Now (Ps)

? 1,110

Stock Price Now (Ps)

? 1,110

Standard Dev - Annual (s)

30.00%

Standard Dev - Annual (s)

30.00%

Risk free Rate - Annual (R)

6.00%

Risk free Rate - Annual (R)

6.00%

Exercise Price (E)

? 1,100

Exercise Price (E)

? 1,100

Time To Maturity - Years (T)

0.0833

Time To Maturity - Years (T)

0.1667

Dividend yield (d)

1.00%

Dividend yield (d)

1.00%

Outputs

Outputs

d1

0.196

d1

0.203

d2

0.109

d2

0.081

N(d1)

0.578

N(d1)

0.581

N(d2)

0.544

N(d2)

0.532

Call Price (Vc)

? 45.77

Call Price (Vc)

? 63.74

-d1

-0.196

-d1

-0.203

-d2

-0.109

-d2

-0.081

N(-d1)

0.422

N(-d1)

0.419

N(-d2)

0.456

N(-d2)

0.468

Put Price (Pp)

? 31.21

Put Price (Pp)

? 44.64

In the above instance we have evaluated a rise in time to expiry of the option. What happens to the value of the option when the time to expiry goes up? You will notice that when we move the expiry of the option from 1 month to two months, the value of the call and the put option goes up. The reason is quite simple. Higher time means greater scope for the price to move in your favour. If the price moves against you then anyways you have the option of letting your option expire worthless.