What Are the Main Components of an Options Premium (Intrinsic and Extrinsic Value)?

The options premium is composed of two main parts: intrinsic value and extrinsic (or time) value. Intrinsic value is the immediate profit if the option were exercised (only present if ITM).

Extrinsic value is the remaining portion of the premium, which is based on time until expiration, volatility, and interest rates. As expiration approaches, the extrinsic value decays to zero.