What Is the Relationship between an Option’s Premium and Its Extrinsic (Time) Value?

An option's premium is the total price paid by the buyer and consists of two components: intrinsic value and extrinsic value. Extrinsic value, also known as time value, is the portion of the premium that is attributable to the option's remaining time until expiration and the implied volatility of the underlying asset.

The longer the time to expiration and the higher the implied volatility, the greater the extrinsic value. Extrinsic value decays over time, reaching zero at expiration.