What Is “Extrinsic Value” or “Time Value” in an Option’s Premium?

Extrinsic value is the portion of an option's premium that exceeds its intrinsic value. It represents the value attributed to the potential for the option to become profitable before expiration.

It is primarily influenced by time remaining until expiration (Theta) and the expected volatility of the underlying asset (Vega). As expiration nears, extrinsic value decays to zero.