While intrinsic value only changes in response to moves in the stock price, time value is affected by changes in all three of the key variables listed below.
Implied Volatility (IV), which reflects the market's expectation of the stock's future volatility
Changes in the underlying stock price
Decay, which is the reduction in the option's premium as time passes
IMPORTANT: The three variables listed above are each a distinct source of profit or loss. Whenever you place an option trade and observe your total open P&L, the P&L number at which you're looking is a composite number -- it is the sum of the three individual sources of P&L listed above. (ChartBender's Profit Source Technology breaks down the composite P&L number into its three distinct sources for you, which yields powerful insights.)
