What Is the Difference between Intrinsic and Extrinsic Value in an Option?

The intrinsic value of an option is the amount by which it is in-the-money. For a call option, the intrinsic value is the difference between the market price of the underlying asset and the strike price.

For a put option, the intrinsic value is the difference between the strike price and the market price of the underlying asset. The extrinsic value of an option is the difference between the premium and the intrinsic value.

It is also known as the time value of the option.