Every option’s price consists of the sum of its intrinsic value and extrinsic value.
A call’s intrinsic value is the difference between the stock price and the call’s strike price (when the call is in-the-money). A put’s intrinsic value is the difference between the put’s strike price and the stock price (when the put is in-the-money).
An option’s extrinsic value is any value in the option’s price that exceeds its intrinsic value. Extrinsic value is sometimes referred to as “time value,” and can be conceptualized as the value associated with the potential for that option to become valuable before expiration.
Additionally, we’ve included four visualizations of real call and put examples to demonstrate how intrinsic and extrinsic value change relative to shifts in the stock price.
Lastly, we discuss the factors that determine how much extrinsic value an option has.
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