What Is the Concept of ‘Extrinsic Value’ in Option Pricing?
Extrinsic value, also known as time value, is the portion of an option's premium that exceeds its intrinsic value. It represents the market's expectation of the option's potential to become more profitable before expiration.
It is primarily influenced by the time remaining until expiration (Theta) and the volatility of the underlying asset (Vega). It is highest for At-the-Money options.
