How Much Is Too Much? Understanding Time Value in SPY Call Options

Published July 17, 2025

When using long-dated SPY call options to apply leverage, most investors spend their time choosing the right strike and expiration. But there's a critical cost built into every option that often goes overlooked: time value. It’s the part of the premium that slowly disappears, even if the stock goes nowhere — and it can make or break your long-term returns.

In this post, we’ll explain what time value is, what factors affect it, how much is reasonable to pay, and how to evaluate whether you’re getting a fair deal. If you're building a leveraged portfolio using call options, understanding time value is not optional — it’s essential.

Quick Recap: What Is Time Value?

When you buy a call option, you're paying not only for its intrinsic value — the difference between the stock price and strike price — but also for its extrinsic value. This extrinsic value, often called time value, reflects the option’s potential to gain value before expiration. It’s primarily driven by two factors: time remaining until expiration and implied volatility.

The longer the time until expiration, the more chances the stock has to move in your favor — which gives the option more value. That’s why long-dated options (such as LEAPS, which expire in 1 to 3 years) tend to have significantly more time value than shorter-term contracts. You’re essentially paying for flexibility, protection against short-term noise, and the opportunity to profit from long-term moves.

Real Example: SPY Call Option with June 2026 Expiration

As of July 17, 2025, SPY closed at $628.04. Let’s take a real option from the chain: a call with a $500 strike price expiring on June 30, 2026 — roughly one year from now. This call is deeply in the money.

The midpoint between its bid and ask prices is about $152.60. Since each option contract represents 100 shares, the total premium is approximately $15,260.

The option's intrinsic value is calculated as the current SPY price minus the strike: $628.04 − $500 = $128.04. That means if the option expired today, it would be worth $128.04 per share.

But you're paying $152.60 — which is $24.56 more than the intrinsic value. This extra amount is called the time value (or extrinsic value). It represents the market’s pricing of future possibilities — the chance that SPY will rise even more before expiration, along with the benefit of flexibility and limited downside.

However, if SPY stays flat at $628.04 through June 2026, that time value will gradually disappear. At expiration, the option would be worth only its intrinsic value: $128.04. The remaining $24.56 would be lost to time decay — a natural consequence of holding an option as it approaches expiration.

In this example, SPY must rise above $652.60 (the strike price plus the full premium paid) by expiration for the trade to be profitable. That is the true breakeven price. Understanding this relationship is key: when you buy a long-dated call option, the time value is what you're risking — and the stock needs to move enough to justify that upfront cost.

What Affects Time Value?

When using deep in-the-money SPY call options for long-term leverage, it's important to understand what drives the time value portion of the option premium. Even among ITM options, the amount of time value can vary significantly based on a few key factors:

1. Expiration Date

The longer the time to expiration, the more time value an option has. For example, a SPY call that expires in 2.5 years will have noticeably more time value than one expiring in 12 months — even if the strike price and stock price are the same. This is because longer expirations give the option more time to benefit from future price movement, and therefore demand a higher premium.

2. Strike Price / Premium / Leverage Level

These three concepts — strike price, premium, and effective leverage — are closely linked. Once you've selected one, the others can be derived from the options chain and basic math.

In general, a higher strike price leads to a lower premium, which means more leverage — but also a higher proportion of time value. Conversely, a lower strike price results in a higher premium, less leverage, and less time value. If you're targeting a specific leverage level (such as 3x or 4x), the associated time value will be built into that tradeoff.

3. Market-Based Pricing Factors

While you can choose the expiration and strike, some components of time value are set by the market and outside your control. These include implied volatility (which reflects expected future movement), interest rates, and expected dividends. All else equal, higher volatility or rates may push time value up slightly, while expected dividends can reduce it. For SPY, these factors are relatively stable — but they still influence option pricing in the background.

How Much Time Value Should I Pay?

Once you understand what time value is and what drives it, the next question is: how much is too much? You don’t want to overpay for time value — especially when you're using SPY call options as a long-term leveraged position. But how can you tell whether the premium you're paying is reasonable?

Based on our observations, there’s a simple rule of thumb that aligns well with real-world pricing:

If you're aiming for 2x leverage, time value should be around 2% of the stock price per year.
For 3x leverage, time value should be about 3% of the stock price per year.
At 4x leverage, expect roughly 4% per year in time value.
And so on.

This isn't a strict pricing model — just a practical guideline. In most cases, SPY call options that meet these criteria tend to be fairly priced in terms of time value. If you're paying significantly more than this, it may indicate rich premiums due to volatility, skew, or low liquidity. On the other hand, if you're paying noticeably less, the option could be a bargain.

For example, if SPY is trading at $628 and you're considering a 3x leveraged position, a total time value of about $19 per year (3% of $628) would be reasonable. Over a 2-year option, that translates to around $38 in time value embedded in the premium. You can back-calculate this by subtracting the intrinsic value from the total option cost.

Use this guideline to sanity-check your option choices before committing capital. You’re not just choosing a strike — you’re effectively deciding how much you're willing to pay in “interest” for the leverage you're getting.

Real Examples to Verify This Rule

Let’s look at actual SPY call options to see how this guideline holds up in practice. As of July 17, 2025, SPY closed at $628. We’ll examine two long-dated call options that offer different levels of leverage.

Example 1: 3x Leverage, 1-Year Expiration
- Expiration: June 30, 2026
- Strike Price: $440
- Premium: $206.50
- Total cost = 440 + 206.5 = $646.50
- Time value = 646.5 − 628 = $18.50

In this case, the time value is $18.50, which is about 2.95% of the stock price. That aligns closely with the expected 3% for a 3x leveraged position with a 1-year duration.

Example 2: 2x Leverage, 2.4-Year Expiration
- Expiration: December 17, 2027
- Strike Price: $340
- Premium: $318.50
- Total cost = 340 + 318.5 = $658.50
- Time value = 658.5 − 628 = $30.50

Here, the time value is $30.50, or about 4.86% of the stock price. But since this option spans approximately 2.4 years, the annualized time value is about 2.02% per year — very close to the expected 2% for a 2x leveraged setup.

These examples reinforce the idea that time value scales roughly with your chosen leverage level. By breaking down real premiums into intrinsic and extrinsic components, you can quickly assess whether an option is priced fairly for your intended exposure.

Quiz: Is This Time Value Too High?

Let’s test your intuition. Suppose SPY is trading at $628. You find a call option expiring in 1 year with a $460 strike price, and the premium is $200. That gives you roughly 3.14x leverage (628 ÷ 200).

The intrinsic value is $628 − $460 = $168, which means the time value is $200 − $168 = $32. That’s just over 5% of the stock price — for a 1-year option.

Based on our rule of thumb, a 3x leveraged setup should typically involve around 3% per year in time value. So in this case, you’re paying nearly 70% more than expected.

Would you take this trade? What could explain the high premium? Is it justified, or are you overpaying for leverage?

At BackAlpha, we encourage you to ask these questions before placing a trade. Knowing how much time value you're paying — and whether it aligns with your leverage — is key to making smart long-term bets.

Conclusion

Time value is one of the most important — and most overlooked — costs in long-term options trading. When you’re using SPY call options to apply leverage over multi-year periods, even a few percentage points of excess time value can add up to a major drag on performance.

By understanding how time value behaves, what affects it, and how much is reasonable to pay, you can make smarter decisions and avoid hidden inefficiencies. Whether you’re aiming for 2x, 3x, or 4x exposure, use time value as your guide — not just the strike and expiration.

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