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.
Glossar
Time until Expiration
TimeHorizon ⎊ Time until Expiration, or Time to Maturity, is the remaining duration until an options contract reaches its conclusion and its intrinsic value must be determined or the right forfeited.
Extrinsic Value
Volatility ⎊ This component represents the portion of an option's premium driven by market uncertainty regarding the underlying crypto asset's future price movement.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.