pricing
Extrinsic Value (Time Value)
The portion of an option's price above its intrinsic value. Represents the premium paid for time and uncertainty — this is what theta decays.
Formula
Extrinsic = Option Price - Intrinsic Value
Variables
- Extrinsic
- Time value / hope value of the option
- Option Price
- Current market price of the option
- Intrinsic Value
- max(S-K, 0) for calls, max(K-S, 0) for puts
Worked Example
Inputs
- Call Price
- $7.50
- S
- $105
- K
- $100
Calculation Steps
- 1
Intrinsic = max(105 - 100, 0) = $5.00 - 2
Extrinsic = $7.50 - $5.00 = $2.50
Result: Extrinsic = $2.50 — you're paying $2.50 for time & volatility
Intuition
Extrinsic value is highest for ATM options and decreases as you go deeper ITM or OTM. Sellers love extrinsic value because it decays to zero by expiration regardless of direction.