Explain the Concept of “Extrinsic Value” in Options Pricing.
Extrinsic value is the portion of an option's premium that is not intrinsic value. It is also known as time value.
It is determined by factors like the time remaining until expiration (Theta) and the implied volatility (Vega). It represents the possibility that the option will gain intrinsic value before expiration.
All OTM options are 100% extrinsic value.
