Why Is a Deep ‘Out-of-the-Money’ Option’s Premium Composed Entirely of Extrinsic Value?

An option that is deep 'out-of-the-money' (OTM) has a strike price far from the current market price, meaning it has no intrinsic value. Intrinsic value is the profit from immediate exercise, which is zero or negative for an OTM option.

Therefore, the entire premium paid for a deep OTM option is purely extrinsic value, also known as time value. This premium reflects the small probability that the underlying asset's price will move enough before expiration to make the option profitable.