Define “Intrinsic Value” and “Extrinsic Value” of an Option

Intrinsic value is the portion of the option's premium that is "in-the-money," representing the profit an option holder would realize if they exercised the option immediately. It is zero for Out-of-the-Money (OTM) and At-the-Money (ATM) options.

Extrinsic value, also known as time value, is the amount by which the premium exceeds the intrinsic value. It reflects the potential for the option to become profitable before expiration and is influenced by time, volatility, and interest rates.