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...apparently.

So in January, I bought 500 shares of MHR at $3.21, and sold 5 Jan 16 $3.50 calls for 0.44 each. I understand that there is no intrinsic value to the calls because the strike is above the share price. All the value is time value. Since purchase, the stock price has gone down to $2.78, but the call price has risen to $0.60

So the stock price has gone down 13%, there is less time before expiration of the call, yet its time value has risen 27%? Shouldn't the time value go down (or at least stay the same this far out from expiration)in a case like this? I don't get it.

I'm not worried about the trade. Either the calls will expire worthless in January and I'll make $220 bucks or the stock will be called away, also at a modest profit.

I'm just thinking about other options trades, and I want to understand what I'm doing. ...and I still apparently don't fully understand time value yet.
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You are correct, call price movements typically correlate to movements of the underlying share price. Stocks will very low option liquidity & wide bid / ask spreads, like MHR, may appear to behave differently. I say 'appear' because, in the example you cite in your post, you probably would not have been able to sell the call for .6 (which I assume was the bid / ask midpoint?)

Generally speaking, yes, time value decreases as option expiration nears.
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Only the "last trade" of that option is $0.60, but that has no bearing on what it would sell for right now. In fact, this option is VERY illiquid and hardly trades. For example, today it hasn't traded at all (volume is zero), and the bid/ask spread is $0.20/0.85 which is a VERY wide spread and is typical of thinly traded instruments.

It's not time value that you need to understand here, it's how options trade and what the bid/ask means (it is the only reliable indicator of an options "worth" at any moment in time, what an option traded for yesterday or last week is now meaningless in this context).
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Demotage,

You wrote, I'm just thinking about other options trades, and I want to understand what I'm doing. ...and I still apparently don't fully understand time value yet.

I'm no expert ... but as I understand it, an option's time value is a product of:

1. Time remaining,
2. Volatility, and
3. Liquidity.

Basically all the factors that are not included in intrinsic value. Obviously if the stock's price changes a LOT, the volatility has risen so it's time value rises - at least relatively speaking. And of course a lack of option interest can result in widening spreads, which you can expect to move against you no matter what position you take.

At least that's how I understand this stuff.

- Joel
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Thanks, that's how I understand it too, at least to a point. I don't understand if there is an actual metric that tells you what time value 'should' be, or whether it is just basically bid up and down by the market. I think it's the latter, but I wouldn't swear by it at this point. I just didn't understand why, when in this particular instance I mentioned, the time value went up when the factors seemed to suggest it should go down. It seems that the answer (as I was told), is that the option is thinly traded so the spread between big and ask got wide - and the mid-point value went up - although in actuality, it would be unlikely to trade for that amount.
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Demotage,

You wrote, I don't understand if there is an actual metric that tells you what time value 'should' be, or whether it is just basically bid up and down by the market.

I believe it's usually by the market, if there is any activity ... else by a market maker. The market maker should be using the Black Scholes Model to determine an ideal option price, especially in the absence of any current offers. See:

http://www.investopedia.com/university/options-pricing/black...
https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

Any good online broker should have some tool that will give you the Black Scholes pricing for an option and let you tweak some of the parameters of the model and give you derivative information about the contract's pricing history. For instance, TD Ameritrade calls this information "Greeks/Analytics". The theoretical price for your Jan'16 3.50 calls is 0.52, given TD Ameritrade's default assumptions. However the Bid/Ask spread is very wide (0.20/0.85), which could mean there is little interest in the contracts or it could just mean I looked after the market closed.

BTW the guys that invented this formula won the 1997 Nobel Prize in Economics.

- Joel
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Thanks!
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