Extrinsic Value
Extrinsic value (time value) is the part of an option’s premium beyond its intrinsic value, reflecting time to expiration and implied volatility.
Extrinsic value = premium − intrinsic value. It is highest for at-the-money options and decays to zero by expiration as theta erodes it.
Higher implied volatility inflates extrinsic value because larger expected moves make the option more likely to gain.
Example. A 100-strike call trading at $4.00 with the stock at $101 has $1 intrinsic and $3 extrinsic value; that $3 decays to $0 by expiration if the stock stays put.
FAQ
Why is extrinsic value highest at the money?
At-the-money options have the greatest uncertainty about finishing in- or out-of-the-money, so the market prices in the most time value.
Does extrinsic value go to zero?
Yes — at expiration there is no time left, so an option is worth only its intrinsic value.