The degree to which the price of the underlying asset of an option fluctuates. For an out-of-the-money option, it represents the entire value (the option’ premium or price). The sum of time value and opportunity value (volatility value) and intrinsic value equals the premium for an in-the-money option. In equation form, an option’s premium is:

Option premium = intrinsic value + time value + volatility value

The greater the volatility of the underlying, the higher the volatility component of the premium or the price a buyer pays for an option (also the price a seller receives for an option sold/ written).