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| Extrinsic Value |
Extrinsic value is an expression used regularly to refer to options. It can be defined as the difference between the price of an option and its intrinsic value. In this sense, the intrinsic value corresponds to the difference between the strike price of the option and the market price of the underlying asset, the meaning depending on whether it refers to a Call or a Put.
The extrinsic value is also known as the time value, and can be defined as the amount of money that the purchaser of an option is prepared to pay in the hope that, over the lifetime of this financial asset, a change in the price of the underlying asset leads to an increase in the value of the option.
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In this way, the option premium can be considered as the sum of the time value or extrinsic value and its intrinsic value. To the extent to which it reflects the excess of the premium over the intrinsic value, the extrinsic value of the option decreases as the moment of expiry of the title approaches.
This is because the extrinsic value of the option reflects the likelihood of the option moving into the money, due to which it will be greater the longer the time that remains before it expires.
