Explain the Difference between Extrinsic and Intrinsic Value in Options

Intrinsic value is the immediate profit realized if the option were exercised now. For a call, it is the greater of (Spot Price – Strike Price) or zero.

Extrinsic value, also known as time value, is the portion of the premium that exceeds the intrinsic value. It represents the value derived from the possibility of the option moving further into the money before expiration.

Theta decay exclusively erodes the extrinsic value.