Extrinsic Value

Extrinsic value, also known as time value, represents the portion of an option’s premium that is influenced by factors other than its intrinsic value. This includes time until expiration, implied volatility, and market demand. Even an in-of-the-money option can have extrinsic value because of potential future price movements. As expiration nears, extrinsic value declines due to volatility and time decay, making it a key factor in options pricing strategies. And, of course, out-of-the money contracts consist entirely of extrinsic value, as they have no intrinsic value. See also: Intrinsic Value