Can an Option’s Extrinsic Value Ever Be Negative?
No, an option's extrinsic value (time value) can never be negative. By definition, the option premium must be greater than or equal to its intrinsic value.
If the extrinsic value were negative, the premium would be less than the intrinsic value, creating an immediate, risk-free arbitrage opportunity, which is impossible in an efficient market. The minimum value for extrinsic value is zero.
Glossar
Risk-Free Arbitrage
Arbitrage ⎊ The theoretical possibility of generating risk-free profit by exploiting price discrepancies for identical or equivalent assets across different markets or exchanges represents a cornerstone of financial theory.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
Extrinsic Value
Volatility ⎊ This component represents the portion of an option's premium driven by market uncertainty regarding the underlying crypto asset's future price movement.