Distinguish between Intrinsic Value and Extrinsic Value of an Option.
Intrinsic value is the immediate profit realized if the option were exercised instantly; it is the difference between the underlying price and the strike price (only if favorable). Extrinsic value, also known as time value, is the remaining part of the option's premium.
It represents the value of the possibility that the option will move further into the money before expiration.