What Is the Difference between Intrinsic Value and Extrinsic Value of an Option? ⎊ Path

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

Intrinsic value is the immediate profit realized if the option were exercised now (Market Price – Strike Price, or vice versa). It is always zero or positive.

Extrinsic value, or time value, is the portion of the option's premium that is attributed to the time remaining until expiration and the underlying asset's volatility. Total Premium = Intrinsic Value + Extrinsic Value.

Extrinsic value decays to zero at expiration.

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