Intrinsic Vs. Extrinsic Value
Intrinsic value represents the amount by which an option is in-the-money.
- A call option has intrinsic value when the underlying price is above the strike price
- A put option has intrinsic value when the underlying price is below the strike price
Options that are out-of-the-money have no intrinsic value.
Extrinsic value, often referred to as time value, reflects the portion of an option’s price attributable to factors other than intrinsic value, such as:
- Time remaining until expiration
- Expected volatility
Extrinsic value generally declines as expiration approaches.
For example: If a stock is printing $98 and the 100 put is worth $3. $1 is extrinsic value and $2 is Intrinsic value.