Options Pricing
What is Extrinsic Value?
The time and volatility component of an option's price.
📖 Complete Definition
Extrinsic value (or time value) is the portion of an option's price above its intrinsic value. It reflects time to expiration, implied volatility, and other factors. Extrinsic value decays over time (theta decay) and drops when IV decreases. At expiration, extrinsic value is zero - options are worth only their intrinsic value.
📐 Formula
Extrinsic Value = Option Premium - Intrinsic Value
💡 Examples
- →Option trading at $5 with $3 intrinsic value has $2 extrinsic value
- →OTM options are 100% extrinsic value
❓ Frequently Asked Questions
How fast does extrinsic value decay?
Decay accelerates as expiration approaches, following a square root of time pattern. The final week before expiration sees the fastest decay, especially for ATM options.
🔗 Related Terms
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