Why Does an OTM Option Only Have Extrinsic Value?

An Out-of-the-Money (OTM) option has no intrinsic value because exercising it immediately would result in a loss. For a call, the strike price is above the current market price; for a put, the strike price is below the current market price.

Therefore, the entire premium of an OTM option is composed of its extrinsic value (time value), which represents the possibility that the asset price will move favorably before expiration, allowing the option to become profitable.