How Does an option’S’premium’ Relate to Its Intrinsic and Extrinsic Value?

The option premium is the total price paid by the buyer to the seller for the contract. This premium is composed of two parts: intrinsic value and extrinsic (or time) value.

Intrinsic value is the immediate profit if the option were exercised (market price minus strike price for a Call, or vice versa for a Put). Extrinsic value, which is always non-negative, is the remainder of the premium and reflects the time until expiration and the underlying asset's volatility.