What Is the Difference between Intrinsic Value and Extrinsic Value in Options Pricing?

Intrinsic value is the immediate profit if the option were exercised now. It is zero for OTM options.

Extrinsic value, or time value, is the portion of the premium based on the time remaining until expiration and the volatility of the underlying asset. The option premium is the sum of these two values.

As the expiration date approaches, the extrinsic value decays to zero.