When a put option is out of the money, its premium consists primarily of what?

When a put option is out of the money, its premium consists primarily of time value only. A put option is considered out of the money when the current price of the underlying asset is above the strike price of the option. In this situation, the option does not have intrinsic value because there is no benefit in exercising the option to sell the underlying asset at the strike price which is lower than the market price.

The premium of an option is made up of intrinsic value and time value. Since out-of-the-money put options have no intrinsic value, any premium that the option has is solely due to time value. Time value reflects the potential for the option to become profitable before expiration as the market price of the underlying asset may decrease, thus giving the option value in the future. The longer the time until expiration, the greater the time value, as there is more time for the underlying asset's price to change.